UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the Quarterly Period ended September 30, 2019
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from __________________ to __________________
Commission
File number 0-54433
MARIMED
INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
|
27-4672745
|
(State
or Other Jurisdiction of
|
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
|
Identification
No.)
|
10
Oceana Way
Norwood,
MA 02062
(Address
of Principal Executive Offices)
617-795-5140
(Registrant’s
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act: None.
Title
of each class
|
|
Ticker
symbol(s)
|
|
Name
of each exchange on which registered
|
Not
Applicable.
|
|
Not
Applicable.
|
|
Not
Applicable.
|
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”,
“smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated filer [ ]
|
Accelerated
filer [X]
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [X]
|
|
Emerging
growth company [X]
|
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]
No [X]
As
of November 27, 2019, 219,238,047 shares of the Issuer’s Common Stock were outstanding.
MariMed
Inc.
Table
of Contents
MariMed
Inc.
Condensed
Consolidated Balance Sheets
|
|
September
30,
2019
|
|
|
December
31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
136,682
|
|
|
$
|
4,104,315
|
|
Accounts
receivable, net
|
|
|
10,170,631
|
|
|
|
5,376,966
|
|
Accounts
receivable from related party, net
|
|
|
33,200,000
|
|
|
|
-
|
|
Deferred
rents receivable
|
|
|
2,042,923
|
|
|
|
2,096,384
|
|
Due
from third parties
|
|
|
3,178,980
|
|
|
|
3,860,377
|
|
Notes
receivable, current portion
|
|
|
1,321,284
|
|
|
|
51,462
|
|
Inventory
|
|
|
1,462,149
|
|
|
|
-
|
|
Other
current assets
|
|
|
211,858
|
|
|
|
219,012
|
|
Total
current assets
|
|
|
51,724,507
|
|
|
|
15,708,516
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
40,158,470
|
|
|
|
34,099,864
|
|
Intangibles,
net
|
|
|
3,592,302
|
|
|
|
185,000
|
|
Investments
|
|
|
32,728,854
|
|
|
|
1,672,163
|
|
Notes
receivable, less current portion
|
|
|
2,471,595
|
|
|
|
1,092,376
|
|
Debentures
receivable
|
|
|
-
|
|
|
|
30,000,000
|
|
Right-of-use
assets under operating leases
|
|
|
5,915,004
|
|
|
|
-
|
|
Right-of-use
assets under finance leases
|
|
|
119,274
|
|
|
|
-
|
|
Due
from related parties
|
|
|
-
|
|
|
|
119,781
|
|
Other
assets
|
|
|
345,905
|
|
|
|
82,924
|
|
Total
assets
|
|
$
|
137,055,911
|
|
|
$
|
82,960,624
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,387,205
|
|
|
$
|
3,915,430
|
|
Accrued
expenses
|
|
|
5,185,029
|
|
|
|
1,588,368
|
|
Deferred
rents payable
|
|
|
-
|
|
|
|
105,901
|
|
Notes
payable
|
|
|
21,073,459
|
|
|
|
3,877,701
|
|
Mortgages
payable, current portion
|
|
|
220,256
|
|
|
|
188,231
|
|
Operating
lease liabilities, current portion
|
|
|
807,757
|
|
|
|
-
|
|
Finance
lease liabilities, current portion
|
|
|
38,411
|
|
|
|
-
|
|
Due
to related parties
|
|
|
415,713
|
|
|
|
276,311
|
|
Unearned
revenue from related party
|
|
|
4,170,750
|
|
|
|
-
|
|
Other
current liabilities
|
|
|
197,943
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
35,496,523
|
|
|
|
9,951,942
|
|
|
|
|
|
|
|
|
|
|
Mortgages
payable, less current portion
|
|
|
7,174,385
|
|
|
|
7,348,581
|
|
Debentures
payable
|
|
|
5,877,556
|
|
|
|
3,557,440
|
|
Operating
lease liabilities, less current portion
|
|
|
5,531,376
|
|
|
|
-
|
|
Finance
lease liabilities, less current portion
|
|
|
82,790
|
|
|
|
-
|
|
Other
liabilities
|
|
|
100,200
|
|
|
|
338,200
|
|
Total
liabilities
|
|
|
54,262,830
|
|
|
|
21,196,163
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Series
A convertible preferred stock, $0.001 par value; 50,000,000 shares authorized at September 30, 2019 and December 31,
2018; no shares issued or outstanding at September 30, 2019 and December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value; 500,000,000 shares authorized at September 30, 2019 and December 31, 2018; 218,213,973
and 211,013,043 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
|
|
|
218,214
|
|
|
|
211,013
|
|
Common
stock subscribed but not issued; 6,603,532 and 97,136 shares at September 30, 2019 and December 31, 2018,
respectively
|
|
|
4,958,332
|
|
|
|
169,123
|
|
Additional
paid-in capital
|
|
|
105,087,809
|
|
|
|
87,180,165
|
|
Accumulated
deficit
|
|
|
(28,320,616
|
)
|
|
|
(25,575,808
|
)
|
Noncontrolling
interests
|
|
|
849,342
|
|
|
|
(220,032
|
)
|
Total
stockholders’ equity
|
|
|
82,793,081
|
|
|
|
61,764,461
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
137,055,911
|
|
|
$
|
82,960,624
|
|
See
accompanying notes to condensed consolidated financial statements.
MariMed
Inc.
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,209,328
|
|
|
$
|
3,391,582
|
|
|
$
|
11,382,942
|
|
|
$
|
8,411,858
|
|
Revenues from
related party
|
|
|
7,014,371
|
|
|
|
-
|
|
|
|
29,029,249
|
|
|
|
-
|
|
Total revenues
|
|
|
11,223,699
|
|
|
|
3,391,582
|
|
|
|
40,412,191
|
|
|
|
8,411,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
6,523,283
|
|
|
|
1,521,783
|
|
|
|
24,523,626
|
|
|
|
3,324,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,700,416
|
|
|
|
1,869,799
|
|
|
|
15,888,565
|
|
|
|
5,087,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
1,241,535
|
|
|
|
352,257
|
|
|
|
2,740,039
|
|
|
|
821,815
|
|
Marketing and promotion
|
|
|
91,562
|
|
|
|
37,202
|
|
|
|
286,521
|
|
|
|
166,906
|
|
General
and administrative
|
|
|
2,394,692
|
|
|
|
2,029,333
|
|
|
|
6,752,168
|
|
|
|
4,516,132
|
|
Total operating
expenses
|
|
|
3,727,789
|
|
|
|
2,418,792
|
|
|
|
9,778,728
|
|
|
|
5,504,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
972,627
|
|
|
|
(548,993
|
)
|
|
|
6,109,837
|
|
|
|
(417,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,516,576
|
)
|
|
|
(478,118
|
)
|
|
|
(9,076,583
|
)
|
|
|
(1,080,637
|
)
|
Interest income
|
|
|
79,016
|
|
|
|
23,270
|
|
|
|
425,770
|
|
|
|
62,176
|
|
Loss on debt settlements
|
|
|
-
|
|
|
|
(2,407,671
|
)
|
|
|
-
|
|
|
|
(4,184,631
|
)
|
Equity in losses
of investments
|
|
|
(2,933,252
|
)
|
|
|
-
|
|
|
|
(1,020,310
|
)
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
2,948,917
|
|
|
|
(3,600
|
)
|
Total non-operating
expenses
|
|
|
(7,370,812
|
)
|
|
|
(2,862,519
|
)
|
|
|
(6,722,206
|
)
|
|
|
(5,206,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(6,398,185
|
)
|
|
|
(3,411,512
|
)
|
|
|
(612,369
|
)
|
|
|
(5,623,696
|
)
|
Provision for
income taxes
|
|
|
901,477
|
|
|
|
-
|
|
|
|
1,886,072
|
|
|
|
12,407
|
|
Net loss
|
|
$
|
(7,299,662
|
)
|
|
$
|
(3,411,512
|
)
|
|
$
|
(2,498,441
|
)
|
|
$
|
(5,636,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
attributable to noncontrolling interests
|
|
$
|
99,021
|
|
|
$
|
91,362
|
|
|
$
|
246,367
|
|
|
$
|
223,882
|
|
Net income (loss)
attributable to MariMed Inc.
|
|
$
|
(7,398,683
|
)
|
|
$
|
(3,502,874
|
)
|
|
$
|
(2,744,808
|
)
|
|
$
|
(5,859,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
per share
|
|
$
|
(0.034
|
)
|
|
$
|
(0.018
|
)
|
|
$
|
(0.013
|
)
|
|
$
|
(0.031
|
)
|
Weighted average
common shares outstanding
|
|
|
217,417,326
|
|
|
|
196,415,503
|
|
|
|
214,274,342
|
|
|
|
186,952,362
|
|
See
accompanying notes to condensed consolidated financial statements.
MariMed
Inc.
Condensed
Consolidated Statements of Stockholders’ Equity
(Unaudited)
|
|
Series
A Convertible Preferred Stock
|
|
|
Series
A Convertible Preferred Stock Subscribed But Not Issued
|
|
|
Common
Stock
|
|
|
Common
Stock Subscribed But Not Issued
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Non-Controlling
|
|
|
Total Stockholders’
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interests
|
|
|
Equity
|
|
Balances at December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
500,000
|
|
|
$
|
500
|
|
|
|
176,850,331
|
|
|
$
|
176,850
|
|
|
|
1,000,000
|
|
|
$
|
370,000
|
|
|
$
|
22,256,060
|
|
|
$
|
(11,971,740
|
)
|
|
$
|
175,490
|
|
|
$
|
11,007,160
|
|
Sales of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,189,738
|
|
|
|
14,190
|
|
|
|
|
|
|
|
|
|
|
|
16,881,810
|
|
|
|
|
|
|
|
|
|
|
|
16,896,000
|
|
Conversion of Series A preferred
stock
|
|
|
|
|
|
|
|
|
|
|
(500,000
|
)
|
|
|
(500
|
)
|
|
|
970,988
|
|
|
|
971
|
|
|
|
|
|
|
|
|
|
|
|
33,573
|
|
|
|
|
|
|
|
|
|
|
|
34,044
|
|
Issuance of subscribed shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
(1,000,000
|
)
|
|
|
(370,000
|
)
|
|
|
369,000
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
iRollie acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
264,317
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
Settlement of obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,367,632
|
|
|
|
3,368
|
|
|
|
2,894
|
|
|
|
10,000
|
|
|
|
3,627,253
|
|
|
|
|
|
|
|
|
|
|
|
3,640,621
|
|
Conversion of membership interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,222
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
602,000
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
38,398
|
|
|
|
|
|
|
|
|
|
|
|
39,000
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,899,934
|
|
|
|
1,900
|
|
|
|
|
|
|
|
|
|
|
|
210,384
|
|
|
|
|
|
|
|
|
|
|
|
212,284
|
|
Amortization of option grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,023,300
|
|
|
|
|
|
|
|
|
|
|
|
4,084,658
|
|
Amortization of stand-alone warrant
issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,351,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant discount on promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,709,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,018,534
|
|
|
|
4,019
|
|
|
|
1,231,060
|
|
|
|
3,250,000
|
|
|
|
8,474,786
|
|
|
|
|
|
|
|
|
|
|
|
11,728,805
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(507,453
|
)
|
|
|
(507,453
|
)
|
Net income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,859,985
|
)
|
|
|
223,882
|
|
|
|
(5,636,103
|
)
|
Balances at September 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
203,121,379
|
|
|
$
|
203,122
|
|
|
|
1,498,271
|
|
|
$
|
3,860,000
|
|
|
$
|
55,975,700
|
|
|
$
|
(17,831,725
|
)
|
|
$
|
(108,081
|
)
|
|
$
|
42,099,016
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
Series
A Convertible Preferred Stock Subscribed But Not Issued
|
|
|
Common
Stock
|
|
|
Common
Stock Subscribed But Not Issued
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Non-Controlling
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interests
|
|
|
Equity
|
|
Balances
at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
211,013,043
|
|
|
$
|
211,013
|
|
|
|
97,136
|
|
|
$
|
169,123
|
|
|
$
|
87,180,165
|
|
|
$
|
(25,575,808
|
)
|
|
$
|
(220,032
|
)
|
|
$
|
61,764,461
|
|
Sales
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
799,995
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
2,599,200
|
|
|
|
|
|
|
|
|
|
|
|
2,600,000
|
|
Issuance of subscribed
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,136
|
|
|
|
97
|
|
|
|
(97,136
|
)
|
|
|
(169,123
|
)
|
|
|
169,026
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
MediTaurus
acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
752,260
|
|
|
|
2,080,000
|
|
|
|
|
|
|
|
|
|
|
|
1,200,000
|
|
|
|
3,280,000
|
|
Terrace
investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
1,589,500
|
|
|
|
|
|
|
|
|
|
|
|
1,590,000
|
|
Harvest
payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
417,352
|
|
|
|
417
|
|
|
|
2,644,456
|
|
|
|
413,894
|
|
|
|
11,189
|
|
|
|
|
|
|
|
|
|
|
|
425,500
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
686,104
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
611,756
|
|
|
|
|
|
|
|
|
|
|
|
612,442
|
|
Amortization
of stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,820
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
193,601
|
|
|
|
|
|
|
|
|
|
|
|
193,710
|
|
Amortization
of option grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,219,958
|
|
|
|
|
|
|
|
|
|
|
|
1,219,958
|
|
Amortization
of stand-alone warrant issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139,015
|
|
|
|
|
|
|
|
|
|
|
|
139,015
|
|
Warrant
discount on promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600,621
|
|
|
|
|
|
|
|
|
|
|
|
600,621
|
|
Warrant
discount on debentures payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148,056
|
|
|
|
|
|
|
|
|
|
|
|
1,148,056
|
|
Beneficial
conversion feature on debentures payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,235,469
|
|
|
|
|
|
|
|
|
|
|
|
4,235,469
|
|
Conversion
of debentures payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,591,523
|
|
|
|
3,592
|
|
|
|
3,206,816
|
|
|
|
2,464,438
|
|
|
|
5,391,253
|
|
|
|
|
|
|
|
|
|
|
|
7,859,283
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(376,993
|
)
|
|
|
(376,993
|
)
|
Net
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,744,808
|
)
|
|
|
246,367
|
|
|
|
(2,498,441
|
|
Balances at September
30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
218,213,973
|
|
|
$
|
218,214
|
|
|
|
6,603,532
|
|
|
$
|
4,958,332
|
|
|
$
|
105,087,809
|
|
|
$
|
(28,320,616
|
)
|
|
$
|
849,342
|
|
|
$
|
82,793,081
|
|
The
above statements do not show a column for Series A convertible preferred stock
as the balances were zero and there
was no activity in the periods presented.
See accompanying notes to condensed consolidated financial statements.
MariMed
Inc.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine
Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable
to MariMed Inc.
|
|
$
|
(2,744,808
|
)
|
|
$
|
(5,859,985
|
)
|
Net income (loss) attributable to noncontrolling
interests
|
|
|
246,367
|
|
|
|
223,882
|
|
Adjustments to reconcile net income
(loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
697,946
|
|
|
|
253,713
|
|
Amortization of intangibles
|
|
|
154,167
|
|
|
|
-
|
|
Amortization of stock grants
|
|
|
193,710
|
|
|
|
-
|
|
Amortization of
option grants
|
|
|
1,219,958
|
|
|
|
1,023,300
|
|
Amortization
of warrant issuances
|
|
|
1,975,908
|
|
|
|
1,609,095
|
|
Amortization of beneficial conversion
feature on debentures payable
|
|
|
4,646,070
|
|
|
|
-
|
|
Amortization of
original issue discount
|
|
|
107,256
|
|
|
|
-
|
|
Equity issued to
settle obligations
|
|
|
-
|
|
|
|
3,640,621
|
|
Loss on preferred
stock conversions
|
|
|
-
|
|
|
|
34,044
|
|
Loss on debt settlements
|
|
|
-
|
|
|
|
3,210,472
|
|
Equity in losses
of investments
|
|
|
1,020,310
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable,
net
|
|
|
(4,788,303
|
)
|
|
|
(2,566,254
|
)
|
Accounts receivable
from related party, net
|
|
|
(33,200,000
|
)
|
|
|
-
|
|
Deferred rents
receivable
|
|
|
53,461
|
|
|
|
(1,096,908
|
)
|
Due from third
parties
|
|
|
(174,516
|
)
|
|
|
(1,925,735
|
)
|
Inventory
|
|
|
(942,399
|
)
|
|
|
-
|
|
Other current assets
|
|
|
7,154
|
|
|
|
(100,684
|
)
|
Other assets
|
|
|
(262,981
|
)
|
|
|
29,731
|
|
Accounts payable
|
|
|
(178,223
|
)
|
|
|
(198,836
|
)
|
Accrued expenses
|
|
|
3,339,325
|
|
|
|
129,689
|
|
Deferred rents payable
|
|
|
(105,901
|
)
|
|
|
-
|
|
Operating lease
payments
|
|
|
424,129
|
|
|
|
-
|
|
Finance lease interest
payments
|
|
|
(1,824
|
)
|
|
|
-
|
|
Unearned revenue
|
|
|
4,170,750
|
|
|
|
-
|
|
Other current
liabilities
|
|
|
197,943
|
|
|
|
-
|
|
Other
liabilities
|
|
|
(238,000
|
)
|
|
|
53,755
|
|
Net cash used
in operating activities
|
|
|
(24,182,501
|
)
|
|
|
(1,540,100
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(6,741,632
|
)
|
|
|
(7,259,413
|
)
|
Purchase of cannabis licenses
|
|
|
(150,000
|
)
|
|
|
-
|
|
MediTaurus acquisition
|
|
|
(655,804
|
)
|
|
|
-
|
|
Investment in Sprout
|
|
|
-
|
|
|
|
(100,000
|
)
|
Investment in convertible debentures
|
|
|
-
|
|
|
|
(6,750,000
|
)
|
Investment in notes receivable
|
|
|
(2,030,000
|
)
|
|
|
(300,000
|
)
|
Interest on notes receivable
|
|
|
175,509
|
|
|
|
-
|
|
Due from related
parties
|
|
|
119,781
|
|
|
|
29,087
|
|
Net cash used
in investing activities
|
|
|
(9,282,146
|
)
|
|
|
(14,380,326
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from subscribed common stock
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
2,600,000
|
|
|
|
16,896,000
|
|
Issuance of promissory notes
|
|
|
17,000,000
|
|
|
|
3,000,000
|
|
Payments on promissory notes
|
|
|
-
|
|
|
|
(700,000
|
)
|
Proceeds from issuance of debentures
|
|
|
9,600,000
|
|
|
|
-
|
|
Proceeds from mortgages
|
|
|
-
|
|
|
|
1,998,360
|
|
Payments on mortgages
|
|
|
(142,170
|
)
|
|
|
(84,952
|
)
|
Exercise of stock options
|
|
|
75,500
|
|
|
|
39,000
|
|
Exercise of warrants
|
|
|
612,442
|
|
|
|
212,284
|
|
Due to related parties
|
|
|
139,402
|
|
|
|
(196,000
|
)
|
Finance lease principal payments
|
|
|
(11,167
|
)
|
|
|
-
|
|
Distributions
|
|
|
(376,993
|
)
|
|
|
(507,453
|
)
|
Net cash provided
by financing activities
|
|
|
29,497,014
|
|
|
|
20,657,239
|
|
|
|
|
|
|
|
|
|
|
Net change to cash and cash equivalents
|
|
|
(3,967,633
|
)
|
|
|
4,736,813
|
|
Cash and cash
equivalents at beginning of period
|
|
|
4,104,315
|
|
|
|
1,290,231
|
|
Cash and cash
equivalents at end of period
|
|
$
|
136,682
|
|
|
$
|
6,027,044
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
699,582
|
|
|
$
|
931,195
|
|
Cash
paid for taxes
|
|
$
|
88,150
|
|
|
$
|
12,021
|
|
|
|
|
|
|
|
|
|
|
Non-cash
activities:
|
|
|
|
|
|
|
|
|
Conversion
of debentures receivable
|
|
$
|
30,000,000
|
|
|
$
|
-
|
|
Operating
lease right-of-use assets and liabilities
|
|
$
|
7,142,150
|
|
|
$
|
-
|
|
Finance
lease right-of-use assets and liabilities
|
|
$
|
134,193
|
|
|
$
|
-
|
|
Conversions
of debentures payable
|
|
$
|
7,859,283
|
|
|
$
|
-
|
|
Beneficial
conversion feature on debentures payable
|
|
$
|
4,235,469
|
|
|
$
|
-
|
|
Discount
on debentures payable
|
|
$
|
1,148,056
|
|
|
$
|
-
|
|
Discount
on promissory notes
|
|
$
|
600,621
|
|
|
$
|
-
|
|
MediTaurus
acquisition
|
|
$
|
2,500,000
|
|
|
$
|
-
|
|
Terrace
investment
|
|
$
|
1,590,000
|
|
|
$
|
-
|
|
Harvest
payment
|
|
$
|
1,000
|
|
|
$
|
-
|
|
Conversion
of notes receivable to investment
|
|
$
|
257,687
|
|
|
$
|
-
|
|
Issuance
of common stock associated with subscriptions
|
|
$
|
169,123
|
|
|
$
|
-
|
|
Conversion
of advances to notes receivable
|
|
$
|
855,913
|
|
|
$
|
-
|
|
Exercise
of options via the reduction of an obligation
|
|
$
|
350,000
|
|
|
$
|
|
|
Cashless
exercise of stock options
|
|
$
|
1,762
|
|
|
$
|
-
|
|
Reclass
of accrued interest from notes payable
|
|
$
|
127,450
|
|
|
$
|
-
|
|
Reclass
of accrued interest from debentures payable
|
|
$
|
62,748
|
|
|
$
|
-
|
|
Equity issued
to settle debt
|
|
$
|
-
|
|
|
$
|
8,425,000
|
|
iRollie
acquisition
|
|
$
|
-
|
|
|
$
|
600,000
|
|
See
accompanying notes to condensed consolidated financial statements.
MariMed
Inc.
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 seed-to-sale operations,
dedicated to improving health and wellness through the use of cannabinoids and cannabis products.
Further,
with the enactment of the 2018 U.S. Farm Bill and in recognition of the growing demand for hemp-derived cannabidiol (“CBD”),
the Company made a strategic investment during 2018 in Kentucky-based GenCanna Global Inc., an international cultivator,
producer, and distributor of hemp and GMP-quality CBD oils and isolates (“GenCanna”).
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 strategic plan is primarily comprised of acquiring its cannabis-licensed clients who currently lease
the Company’s facilities, and ultimately consolidating these entities under the MariMed banner. To date, the Company
has completed the acquisition of its clients in Massachusetts and Illinois, with the remaining clients under contract or
in various stages of negotiation, as discussed below. Each acquisition is subject to the respective state’s
approval under its laws governing the ownership and transfer of cannabis licenses. 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™.
Leveraging
its cannabis platform and product experience, as well as its strategic relationship with GenCanna, the Company has recently developed
and is marketing a portfolio of hemp-based CBD brands to multiple retailers and direct to consumers both domestically and internationally.
The
Company’s stock is quoted on the OTCQX 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.
Recent
Transaction Summary
The
following is a chronological summary of the major transactions undertaken by the Company over the past two years to achieve
its strategic plan to transition into a multistate cannabis licensee and seed-to-sale cannabis operator. These transactions
are disclosed in further detail in Note 3 – Acquisitions, Note 4 – Investments, Note 8 – Notes
Receivable, and Note 11 – Debt.
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. In October 2019, the Company
received legislative approval for the transaction. Accordingly, the transaction was consummated and these entities became
wholly-owned subsidiaries which will be consolidated into the Company’s financial statements starting in the fourth
quarter 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 acquisition is still pending. The Company
anticipates approval will be obtained, and the transaction completed, by the end of this year.
December
2018 – The Company entered into a memorandum of understanding (“MOU”) to acquire Kind Therapeutics USA Inc.
(“Kind”), its client in the state of Maryland that holds licenses for the cultivation, production, and
dispensing of medical cannabis. The MOU provides for a total purchase price of $6.3 million in cash, 2,500,000 shares of the
Company’s common stock, and other consideration. The acquisition is subject to the approval by the Maryland Medical
Cannabis Commission, which approval was not expected prior to October 2020. Recently, the sellers of Kind have attempted to
renegotiate the terms of the MOU. Even though the MOU contains all the definitive material terms with respect to the
acquisition transaction and confirms certain management and lease agreements, the selling parties now allege that the MOU is
not an enforceable agreement. The Company engaged with the sellers in good faith in an attempt to reach updated terms
acceptable to both parties, however the sellers failed to reciprocate in good faith, resulting in an impasse. Incrementally,
both parties through counsel further sought to resolve the impasse, however such initiative resulted in both parties
commencing legal proceedings. For further information, see Part II, Item 1. Legal Proceedings in this
report.
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 $300,000 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 $250,000 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”).
During the quarter ended September 30, 2019, MariMed Hemp launched Hemp Engine™, a store-within-a-store turnkey distribution
platform of CBD-based products for retailers.
February
2019 – The Company converted its $30 million investment in subordinated secured convertible debentures of GenCanna
into a 33.5% ownership interest in GenCanna.
May
2019 – The Company loaned an aggregate of $750,000 to Atalo Holdings Inc. (“Atalo”), an agriculture and
biotechnology firm specializing in research, development, and production of industrial hemp and hemp-based CBD products. In July
2019, the Company extended an additional loan of $230,000 to Atalo.
May
2019 – The Company issued 500,000 shares of its common stock in exchange for 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 Jokubas Ziburkas
PhD, a neuroscientist and 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.
August
2019 – The Company loaned $250,000 to High Fidelity Inc., a company that owns and operates two seed-to
sale medical marijuana facilities in the state of Vermont, and produces its own line of CBD products.
October
2019 – The Company closed on the purchase of a 9,000 square foot building in Annapolis, MD which it intends to develop into
a medical marijuana dispensary to be leased to Kind.
Significant
Transactions in the Current Period
During
the nine months ended September 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 U.S. Farm Bill.
The
Company purchased $20.75 million of hemp seed inventory during the nine months ended September 30, 2019, which the Company
sold and delivered to GenCanna for $33.2 million. The Company provided GenCanna with extended payment terms through December 2019,
to coincide with the completion of the seeds’ harvest, although the payment by GenCanna is not contingent upon the
success of such harvest or its yield.
As
required by the relevant accounting guidance, the Company has classified the $33.2 million due from GenCanna as a receivable from
a related party, with approximately $29.0 million recognized as revenue from a related party for the nine months ended
September 30, 2019, and approximately $4.2 million recorded under Unearned Revenue From Related Party on the balance
sheet. Upon payment of the receivable balance by GenCanna, the amount in Unearned Revenue From Related Party will
be recognized as revenue. This deferral of revenue represents the Company’s 33.5% ownership portion of the profit
on these transactions.
To
partially fund the seed purchases, the Company borrowed $17.0 million, which is reflected in Notes Payable on the
balance sheet as of September 30, 2019 and further discussed in Note 11 – Debt.
The
Company continues to explore opportunities to continue such seed sale transactions in the future, however there is no assurance
that such transactions will materialize.
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 September 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 delivery and acceptance of goods by the purchaser.
|
|
|
|
|
●
|
Licensing
– revenue from the sale of precision-dosed, cannabis-infused products, such as Kalm Fusion™ and Betty’s
Eddies™, to legal dispensaries throughout the United States. The recognition of this revenue occurs when the products
are delivered.
|
|
|
|
|
●
|
Consulting
– fees from third-parties 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. This year, 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, (ii) the dispensary and wholesale operations of ARL in Massachusetts and the KPGs in Illinois, and (iii)
the Company’s planned cannabis-licensee acquisitions in 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 from the undiscounted future cash flows of such asset
over the anticipated holding period. An impairment loss is measured by the excess of the asset’s carrying amount
over its estimated fair value.
Impairment
analyses are based on management’s current plans, asset holding periods, and currently available market information.
If these criteria change, the Company’s evaluation of impairment losses may be different and could have a material impact
to the consolidated financial statements.
For
the nine months ended September 30, 2019 and 2018, based on the results of management’s impairment analyses, there
were no impairment losses.
Leases
The
consolidated financial statements reflect the Company’s adoption of ASC 842, Leases, as amended by subsequent accounting
standards updates, utilizing the modified retrospective transition approach which calls for applying the new standard to all of
the Company’s leases effective January 1, 2019, which is the effective date of adoption.
ASC
842 is intended to improve financial reporting of leasing transactions. The most prominent change from previous accounting guidance
is the requirement to recognize right-of-use assets and lease liabilities on the consolidated balance sheet representing
the rights and obligations created by operating leases that extend more than twelve months in which the Company is the lessee.
The Company elected the package of practical expedients permitted under ASC 842. Accordingly, the Company accounted for its
existing operating leases that commenced before the effective date as operating leases under the new guidance without reassessing
(i) whether the contracts contain a lease, (ii) the classification of the leases (iii) the accounting for indirect costs as defined
in ASC 842.
The
Company determines if an arrangement is a lease at inception. Right-of-use assets represent the Company’s right to use an
underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising
from the lease. Non-lease components within lease agreements are accounted for separately. Right-of-use assets and obligations
are recognized at the commencement date based on the present value of lease payments over the lease term, utilizing the Company’s
incremental borrowing rate. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably
certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over
the lease term.
Impairment
of Long-Lived Assets
The
Company evaluates the recoverability of its fixed assets and other assets in accordance with ASC 360-10-15, Impairment or Disposal
of Long-Lived Assets. Impairment of long-lived assets is recognized when the net book value of such assets exceeds their expected
cash flows, in which case the assets are written down to fair value, which is determined based on discounted future cash flows
or appraised values.
Fair
Value of Financial Instruments
The
Company follows the provisions of ASC 820, Fair Value Measurement, to measure the fair value of its financial instruments,
and ASC 825, Financial Instruments, for disclosures on the fair value of its financial instruments. To increase consistency
and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes
the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest
priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable
inputs. The three levels of fair value hierarchy defined by ASC 820 are:
Level
1
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
Level
2
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
|
Level
3
|
Pricing
inputs that are generally observable inputs and not corroborated by market data.
|
The
carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their
fair values due to the short maturity of these instruments.
The
fair value of option and warrant issuances are determined using the Black-Scholes pricing model and employing several inputs such
as the expected life of instrument, the exercise price, the expected risk-free interest rate, the expected dividend yield, the
value of the Company’s common stock on issuance date, and the expected volatility of such common stock. The following table
summarizes the range of inputs used by the Company during the nine months ended September 30, 2019 and 2018:
|
|
Nine
Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Life of instrument
|
|
|
2.3
to 3.0 years
|
|
|
|
0.5
to 5.0 years
|
|
Volatility factors
|
|
|
1.059
to 1.106
|
|
|
|
1.020
to 2.086
|
|
Risk-free interest rates
|
|
|
1.42%
to 2.28%
|
|
|
|
1.92%
to 2.99%
|
|
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 nine months ended September 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 September 30, 2019 and 2018, there were 16,815,107 and 15,497,823, respectively, of potentially dilutive securities
in the form of outstanding options and warrants. As of September 30, 2019, there were $350,000 of convertible promissory
notes and $11.1 million of convertible debentures payable outstanding, 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. No such debt
instruments existed as of September 30, 2018.
For the nine months ended
September 30, 2019 and 2018, all potentially dilutive securities had an anti-dilutive effect on earnings per share, and in accordance
with ASC 260, were excluded from the diluted net income per share calculations, resulting in identical basic and fully diluted
net income per share for these periods. The potentially dilutive securities may dilute earnings per share in the future.
Commitments
and Contingencies
The
Company follows ASC 450, Contingencies, which requires the Company to assess the likelihood that a loss will be incurred
from the occurrence or non-occurrence of one or more future events. Such assessment inherently involves an exercise of judgment.
In assessing possible loss contingencies from legal proceedings or unasserted claims, the Company evaluates the perceived merits
of such proceedings or claims, and of the relief sought or expected to be sought.
If
the assessment of a contingency indicates that it is probable that a material loss will be incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment
indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material,
would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which
case the guarantees would be disclosed.
While
not assured, management does not believe, based upon information available at this time, that a loss contingency will have material
adverse effect on the Company’s financial position, results of operations or cash flows.
Beneficial
Conversion Features on Convertible Debt
Convertible
instruments that are not bifurcated as a derivative pursuant to ASC 815, Derivatives and Hedging, and not accounted for
as a separate equity component under the cash conversion guidance are evaluated to determine whether their conversion prices create
an embedded beneficial conversion feature at inception, or may become beneficial in the future due to potential adjustments.
A
beneficial conversion feature is a nondetachable conversion feature that is “in-the-money” at the commitment date.
The in-the-money portion, also known as the intrinsic value of the option, is recorded in equity, with an offsetting discount
to the carrying amount of convertible debt to which it is attached. The discount is amortized to interest expense over the life
of the debt with adjustments to amortization upon full or partial conversions of the debt.
Risk
and Uncertainties
The
Company is subject to risks common to companies operating within the legal and medical marijuana industries, including, but not
limited to, federal laws, government regulations and jurisdictional laws.
Noncontrolling
Interests
Noncontrolling
interests represent third-party minority ownership of the Company’s consolidated subsidiaries. Net income attributable to
noncontrolling interests is shown in the consolidated statements of operations; and the value of net assets owned by noncontrolling
interests are presented as a component of equity within the balance sheets.
Off
Balance Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
Recent
Accounting Pronouncements
In
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
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 September 30, 2019, the carrying value less amortization was approximately
$31,000.
KPG
of Anna LLC and KPG of Harrisburg LLC
In
October 2018, the Company entered into a purchase agreement to acquire 100% of the ownership interests of KPG of Anna LLC and
KPG of Harrisburg LLC, the Company’s two cannabis-licensed clients that operate medical marijuana dispensaries in the state
of Illinois (both entities collectively, the “KPGs”), from the current ownership group of the KPGs (the “Sellers”).
As part of this transaction, the Company also acquired the Sellers’ ownership interests of Mari Holdings IL LLC,
the Company’s subsidiary which owns the real estate in which the KPGs’ dispensaries are located (“Mari-IL”).
In
October 2019, the transaction was approved by the Illinois Department of Financial & Professional Regulation, and 1,000,000
shares of the Company’s common stock, representing the entire purchase price, were issued to the Sellers. Effective October
1, 2019, the KPGs and Mari-IL are wholly-owned subsidiaries of the Company with 100% of the operations of these entities to
be consolidated into the Company’s financial statements as of that date.
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. Upon consummation, the operations of Harvest will
be consolidated into the Company’s financial statements.
The
purchase price is comprised of the issuance of (i) 1,000,000 shares of the Company’s common stock, in the aggregate, to
two owners of Harvest, 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 legislative approval of the
transaction, and (iii) warrants to purchase 400,000 shares of the Company’s common stock at an exercise price equal to the
closing price of the Company’s common stock on the day prior to legislative approval of the transaction. The
Company issued 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 September 30, 2019.
Kind
Therapeutics USA Inc.
In
December 2018, the Company entered into a memorandum of understanding (“MOU”) to acquire Kind Therapeutics
USA Inc. (“Kind”), its client in Maryland that holds licenses for the cultivation, production, and dispensing of
medical cannabis. The MOU provides for a total purchase price of $6.3 million in cash, 2,500,000 shares of the Company’s
common stock, and other consideration. The acquisition is subject to the approval by the Maryland Medical Cannabis Commission,
which approval was not expected prior to October 2020.
Also
in December 2018, MariMed Advisors Inc, the Company’s wholly owned subsidiary, and Kind entered into a management agreement
pursuant to which the Company provides comprehensive management services in connection with the business and operations of Kind,
and Mari Holdings MD LLC, the Company’s majority-owned subsidiary, entered into a 20-year lease with Kind for its utilization
of the Company’s 180,000 square foot cultivation and production facility in Hagerstown, MD. Additionally, in October 2019,
Mari Holdings MD LLC purchased a 9,000 square foot building in Anne Arundel County, MD for the development of a dispensary which
would be leased to Kind, as further disclosed in Note 19 – Subsequent Events.
Recently,
the sellers of Kind have attempted to renegotiate the terms of the MOU. Even though the MOU contains all the definitive material
terms with respect to the acquisition transaction and confirms the management and lease agreements, the selling parties now allege
that the MOU is not an enforceable agreement. The Company engaged with the sellers in good faith in an attempt to reach updated
terms acceptable to both parties, however the sellers failed to reciprocate in good faith, resulting in an impasse. Incrementally,
both parties through counsel further sought to resolve the impasse, however such initiative resulted in both parties commencing
legal proceedings. For further information, see Part II, Item 1. Legal Proceedings in this report.
MediTaurus
LLC
In
May 2019, the Company entered into a purchase agreement to acquire MediTaurus LLC (“MediTaurus”), a
company established by Jokubas Ziburkas PhD, a neuroscientist and leading authority on CBD and its interactions with the
brain and endocannabinoid system. MediTaurus currently operates in the United States and Europe and has developed proprietary
CBD formulations sold under its Florance™ brand.
Pursuant
to the purchase agreement, the Company acquired 70% of MediTaurus on June 1, 2019, and will acquire the remaining 30% of MediTaurus
on June 1, 2020. The purchase price for the initial 70% was $2.8 million, comprised of cash payments totaling $720,000 and 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, adjusted in September
2019, of the purchase price to the fair value of the assets acquired and liabilities assumed on the acquisition date:
Cash and cash equivalents
|
|
$
|
64,196
|
|
Accounts receivable
|
|
|
5,362
|
|
Inventory
|
|
|
519,750
|
|
Tradename and customer lists
|
|
|
3,411,469
|
|
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 September 30, 2019. A valuation of MediTaurus is currently pending; the useful lives of the intangible assets
will be disclosed in future reports 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 nine months ended September 30, 2019.
NOTE
4 – INVESTMENTS
At
September 30, 2019 and December 31, 2018, the Company’s investments were comprised of the following:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
GenCanna Global Inc.
|
|
$
|
29,301,151
|
|
|
$
|
-
|
|
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
|
|
$
|
32,728,854
|
|
|
$
|
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 its equity in GenCanna’s
net loss from the date of conversion through September 30, 2019, which resulted in a non-cash, non-operating loss to the Company
of approximately $928,000.
Among
other provisions of the subscription agreement governing the GC Debentures, (i) the Company’s CEO was appointed to GenCanna’s
board, and (ii) the Company agreed to fund a $10.0 million employee bonus pool in the event GenCanna meets
certain 2019 operating targets. The Company’s funding obligation will be determined following the audit of GenCanna’s
2019 financial statements. 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 in investments in Terrace. Accordingly, this investment was carried at its
cost of $1.59 million at September 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 investment has been
accounted for under the equity method. Accordingly, the Company recorded its equity in CVP’s net loss for the nine months
ended September 30, 2019, which resulted in a non-cash, non-operating loss to the Company of approximately $92,000
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 September 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 nine months ended September 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 September 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
cash payment of $500,000. Iconic has developed DabTabs™, a unique solution for cannabinoid vaporization via a convenient
portable tablet that provides precisely measured dosing and acts as a storage system for full spectrum extracts, concentrates
and distillates.
The
Company’s investment equates to a current ownership interest in Iconic of approximately 10%. The Company 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 September 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 September 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 U.S.
states of the Binske® portfolio of products, a brand known for utilizing best-in-class proprietary strains
and craft ingredients in its edibles, concentrates, vaporizers, and topicals. In consideration for the license and other rights,
the Company agreed to pay a royalty of 10.0% to 12.5% of gross revenue, as defined, derived from the sale of Binske®
products, subject to an annual minimum royalty. No such gross revenue was generated as of September 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.
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 developed 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 the KPGs
each under a 20-year lease expiring in 2036. With the acquisition of the KPGs approved in October 2019, as disclosed in Note
3 – Acquisitions, this lease will be eliminated upon the consolidation of the KPGs starting in the fourth quarter
of calendar 2018. Accordingly, the rental receipts on such leases have been removed from the table of future minimum
rental receipts below.
|
|
|
|
|
●
|
Maryland
– a 180,000 square foot former manufacturing facility purchased in January 2017 and developed by the Company
into a cultivation and processing facility which is leased to a licensed cannabis client under a triple net lease expiring
in 2037.
|
|
|
|
|
●
|
Massachusetts
– a 138,000 square foot industrial property of which approximately half of the available square footage is leased to
a non-cannabis manufacturing company under a lease expiring in 2022.
|
The
Company subleases the following property:
|
●
|
Delaware
– 4,000 square feet of retail space in a multi-use building space which the Company developed into a cannabis dispensary
which is subleased to its cannabis-licensed client under a under a triple net lease expiring in 2021 with a five-year
option to extend.
|
As
of September 30, 2019 and December 31, 2018, cumulative fixed rental receipts under such leases approximated $8.5 million and
$5.4 million, respectively, compared to revenue recognized on a straight-line basis of approximately $10.5 million and $7.5 million.
Accordingly, the deferred rents receivable balances at September 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 September 30, 2019 were:
2019
|
|
$
|
956,492
|
|
2020
|
|
|
3,896,550
|
|
2021
|
|
|
4,036,550
|
|
2022
|
|
|
3,959,709
|
|
2023
|
|
|
3,661,820
|
|
Thereafter
|
|
|
44,121,550
|
|
Total
|
|
$
|
60,632,671
|
|
NOTE
6 – DUE FROM THIRD PARTIES
At
September 30, 2019 and December 31, 2018, the following amounts were advanced by the Company to its cannabis-licensed clients
primarily for working capital purposes:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Kind Therapeutics USA Inc.
(Maryland licensee)
|
|
$
|
1,367,385
|
|
|
$
|
2,679,496
|
|
KPG of Anna LLC (Illinois licensee)
|
|
|
73,211
|
|
|
|
482,700
|
|
KPG of Harrisburg LLC (Illinois licensee)
|
|
|
79,295
|
|
|
|
449,385
|
|
Harvest Foundation
LLC (Nevada licensee)
|
|
|
1,659,089
|
|
|
|
248,796
|
|
Total due from
third parties
|
|
$
|
3,178,980
|
|
|
$
|
3,860,377
|
|
When
a client is able to organically fund its ongoing operations, such client will issue a promissory note to the Company for the cumulative
advances made up to that point, which will then be paid down monthly over a specified period of time. The Company has successfully
employed this strategy in the past, and accordingly, in January 2019, KPG of Anna LLC and KPG of Harrisburg LLC issued promissory
notes to the Company as further described in Note 7 – Notes Receivable.
NOTE
7 – NOTES RECEIVABLE
At
September 30, 2019 and December 31, 2018, notes receivable were comprised of the following:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
First State Compassion
Center
|
|
$
|
540,732
|
|
|
$
|
578,722
|
|
Healer LLC
|
|
|
834,407
|
|
|
|
307,429
|
|
Atalo Holdings Inc.
|
|
|
999,948
|
|
|
|
-
|
|
KPG of Anna LLC
|
|
|
446,248
|
|
|
|
-
|
|
KPG of Harrisburg LLC
|
|
|
401,560
|
|
|
|
-
|
|
Maryland Health & Wellness Center
Inc.
|
|
|
317,141
|
|
|
|
-
|
|
High Fidelity Inc.
|
|
|
252,843
|
|
|
|
-
|
|
Chooze Corp.
|
|
|
-
|
|
|
|
257,687
|
|
Total notes receivable
|
|
|
3,792,879
|
|
|
|
1,143,838
|
|
Notes receivable,
current portion
|
|
|
1,321,284
|
|
|
|
51,462
|
|
Notes receivable,
less current portion
|
|
$
|
2,471,595
|
|
|
$
|
1,092,376
|
|
The
Company loaned approximately $700,000 to First State Compassion Center, its Delaware cannabis-licensee client, during the period
from October 2015 to April 2016. In May 2016, this client issued a 10-year promissory note, as subsequently amended,
to the Company bearing interest at a rate of 12.5% per annum. The monthly payments of approximately $10,100 will continue through
April 2026, at which time the note will become due. At September 30, 2019 and December 31, 2018, the current portion of
this note was approximately $56,000 and $51,000, respectively, and is included in Notes Receivable, Current Portion
on the respective balance sheets.
During
the period from August to October 2018, the Company loaned $300,000 to Healer LLC (“Healer”), an entity that provides
cannabis education, dosage programs, and products developed by Dr. Dustin Sulak, an integrative medicine physician and nationally
renowned cannabis practitioner. In 2019, the Company loaned Healer an additional $500,000. The loans bear interest at 6% per annum,
with principal and interest payable on the maturity dates which are three years from the respective loan dates.
In
May 2019, the Company extended loans aggregating $750,000 to Atalo Holdings Inc. (“Atalo”), an agriculture
and biotechnology firm specializing in research, development, and production of industrial hemp and hemp-based CBD products. The
loans bear interest at 6% per annum, with principal and interest payable on the earlier of April 3, 2020 or the date on which
the Company acquires at least 25% of Atalo’s outstanding capital stock, in which case the principal and interest due shall
be credited toward Company’s purchase price for such capital stock. In July 2019, the Company loaned an additional $230,000
to Atalo under the same terms as the initial loans.
In
January 2019, KPG of Anna LLC and KPG of Harrisburg LLC each issued a promissory note to the Company in the approximate
amount of $451,000 and $405,000, respectively, representing the advances made by the Company to these entities through December
31, 2018. The notes bear interest at 12% per annum, with monthly principal and interest payments due through December 2038. At
September 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 by the state of Maryland for a cannabis dispensing license, to provide MHWC with a $300,000
construction loan in connection with the buildout of MHWC’s proposed dispensary. The Company also entered into a consulting
services agreement to provide MHWC with advisory and oversight services over a three-year period relating to the development,
administration, operation, and management of MHWC’s proposed dispensary in Maryland. The construction loan bears interest
at 8% per annum, with principal and interest payable in 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
terminate if the consulting services agreement is terminated.
In
August 2019, The Company loaned $250,000 to High Fidelity Inc., a company that owns and operates two seed-to sale medical marijuana
facilities in the state of Vermont, and produces its own line of CBD products. The loan bears interest at a rate of 10% per annum,
with interest-only monthly payments through its maturity in February 2020.
During
the period from May to October 2018, the Company loaned $250,000 to Chooze Corp. bearing interest at 8% per annum and maturing
in 2021. In January 2019, the entire principal and accrued interest balance of approximately $258,000 was converted into a 2.7%
ownership interest in Chooze.
NOTE
8 – INVENTORY/UNEARNED REVENUE FROM RELATED PARTY
During
the nine months ended September 30, 2019, MariMed Hemp purchased $21.6 million of hemp seeds for its wholesale hemp distribution
business and to develop hemp-derived CBD products. The seeds meet the U.S. government’s definition of federally legal industrial
hemp, which was descheduled as a controlled substance and classified as an agricultural commodity upon the signing of the 2018
U.S. Farm Bill. As previously disclosed in Note 1 – Organization and Description of Business, as of September 30,
2019, MariMed Hemp sold a majority of these seeds to GenCanna, a related party, at market value which generated $33.2 million
of receipts. The Company provided GenCanna with extended payment terms through December 2019, to coincide with the completion
of the seeds’ harvest, although the payment by GenCanna is not contingent upon the success of such harvest or its yield.
As
required by the relevant accounting guidance, the Company classified the $33.2 million of billings to GenCanna as a receivable
from a related party, with approximately $29,0 million recognized as revenue from a related party for the nine months ended
September 30, 2019, and approximately $4.2 million recorded under Unearned Revenue From Related Party on the balance
sheet. Upon payment of the receivable balance by GenCanna, the amount in Unearned Revenue From Related Party will
be recognized as revenue.
At
September 30, 2019, inventory was comprised of $850,000 of hemp seeds, and approximately $681,000 of hemp oil extract and CBD
products. At December 31, 2018, inventory was comprised of product packaging and other collateral.
NOTE
9 – DEBENTURES RECEIVABLE
As
detailed in Note 4 – Investments, the Company converted the GC Debentures into a 33.5% ownership interest in GenCanna
in February 2019. Prior to conversion, the GC Debentures bore interest at a rate of 9% per annum and had an original maturity
date of three years from issuance. For the year ended December 31, 2018, the Company earned and received interest income
of approximately $502,000 on the GC Debentures.
NOTE
10 – PROPERTY AND EQUIPMENT
At
September 30, 2019 and December 31, 2018, property and equipment consisted of the following:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Land
|
|
$
|
3,392,710
|
|
|
$
|
3,392,710
|
|
Buildings and building improvements
|
|
|
15,265,983
|
|
|
|
13,566,144
|
|
Tenant improvements
|
|
|
5,798,164
|
|
|
|
5,348,882
|
|
Furniture and fixtures
|
|
|
177,505
|
|
|
|
114,160
|
|
Machinery and equipment
|
|
|
2,544,346
|
|
|
|
1,632,351
|
|
Construction
in progress
|
|
|
15,822,615
|
|
|
|
12,205,447
|
|
|
|
|
43,001,323
|
|
|
|
36,259,694
|
|
Less: accumulated
depreciation
|
|
|
(2,842,853
|
)
|
|
|
(2,159,830
|
)
|
Property and
equipment, net
|
|
$
|
40,158,470
|
|
|
$
|
34,099,864
|
|
During
the nine months ended September 30, 2019 and 2018, additions to property and equipment were approximately $6.7 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 (ii)
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 nine months ended September 30, 2019 of approximately
$3.6 million consisted of the 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 nine months ended September 30, 2019 and 2018 was approximately $698,000 and $254,000, respectively.
NOTE
11 – DEBT
Mortgages
Payable
At
September 30, 2019 and December 31, 2018, mortgage balances, including accrued but unpaid interest, were comprised of the following:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Bank of New England –
Massachusetts property
|
|
$
|
4,851,665
|
|
|
$
|
4,895,000
|
|
Bank of New England – Delaware
property
|
|
|
1,707,942
|
|
|
|
1,791,736
|
|
DuQuoin State
Bank – Illinois properties
|
|
|
835,035
|
|
|
|
850,076
|
|
Total mortgages payable
|
|
|
7,394,642
|
|
|
|
7,536,812
|
|
Mortgages
payable, current portion
|
|
|
(220,257
|
)
|
|
|
(188,231
|
)
|
Mortgages
payable, less current portion
|
|
$
|
7,174,385
|
|
|
$
|
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 mortgage date through May 2019, the Company was required to make monthly payments of interest-only at a rate equal
to the prime rate plus 2%, with a floor of 6.25% per annum. From May 2019 to May 2024, the Company is required to make
principal and interest payments at a rate equal to the prime rate on May 2, 2019 plus 2%, with a floor of 6.25% per annum. Principal
and interest payments shall continue from May 2024 through the end of the lease at a rate equal to the prime rate on May 2, 2024
plus 2%, with a floor of 6.25% per annum. The outstanding principal balance on this mortgage was approximately $4,852,000 and
$4,895,000 on September 30, 2019 and December 31, 2018, respectively, of which approximately $93,000 and $63,000, respectively,
was current.
The
Company maintains a second mortgage with Bank of New England, also personally guaranteed by the Company’s CEO and CFO, for
the 2016 purchase of a 45,070 square foot building in Wilmington, Delaware which was developed into a cannabis seed-to-sale facility
and is currently leased to the Company’s cannabis-licensed client in that state. The mortgage matures in 2031 with
monthly principal and interest payments at a rate of 5.25% per annum through September 2021, and thereafter the rate adjusting
every five years to the then prime rate plus 1.5% with a floor of 5.25% per annum. At September 30, 2019 and December 31, 2018,
the outstanding principal balance on this mortgage was approximately $1,708,000 and $1,792,000, respectively, of which approximately
$105,000 and $104,000, respectively, was current.
In
May 2016, the Company entered into a mortgage agreement with DuQuoin State Bank (“DSB”) for the purchase of
two properties which the Company developed into two 3,400 square foot free-standing retail dispensaries that are currently leased
to the KPGs. On May 5th of each year, this mortgage is due to be repaid unless it is renewed for another year at a rate determined
at the discretion of DSB’s executive committee. The mortgage was renewed in May 2019 at a rate of 8.5% per annum. At September
30, 2019 and December 31, 2018, the outstanding principal balance on this mortgage was approximately $835,000 and $850,000, respectively,
of which approximately $23,000 and $24,000, respectively, was current.
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 September 30, 2019, the pro-rata portion of such payment, based on the term of the $10M
Note, approximated $573,000 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 on the borrower, all of which were
complied with as of September 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 $294,000 of the warrant discount was amortized to interest
expense through September 30, 2019. Accordingly, the carrying value of the $10M Note approximated $9.69 million at September 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 September 30, 2019, the pro-rata portion, based on the term of the note, of
the $180,000 payment approximated $64,000 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 through the issuance of a secured promissory note to an unaffiliated party maturing
in December 2019 and bearing interest at the rate of 13% per annum (the “$6M Note”). 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 September 30, 2019, this note has a principal balance of $6 million
and accrued interest of approximately $424,000.
In
September 2018, the Company raised $3 million from the issuance of a secured promissory note to the same unaffiliated party of
the $6M Note bearing interest at the rate of 10% per annum, with interest payable monthly through maturity in March 2020.
The Company may elect to prepay the note in whole or part at any time after December 17, 2018 without premium or penalty
provided the noteholder is given proper notice and the Company is not in default of the note agreement. The note can be extended
for an additional six months with proper notice, with the interest rate increasing to 12% per annum during the extension period.
The note is secured by the Company’s property in Maryland. 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 September 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 nine months ended September 30, 2019.
During
2018, the Company issued 2,596,313 shares of its common stock and subscriptions on 1,310,196 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 nine months ended September 30, 2019.
During
2018, the Company repaid $700,000 of promissory notes. No repayments of promissory notes occurred during the nine months
ended September 30, 2019.
The
aggregate scheduled maturities of the Company’s total debt outstanding, inclusive of the promissory notes and mortgages
described within this Note 11 – Debt, and the convertible debentures described in the following Note 12 –
Debentures Payable, as of September 30, 2019 were:
2019
|
|
$
|
8,439,091
|
|
2020
|
|
|
14,343,484
|
|
2021
|
|
|
10,262,710
|
|
2022
|
|
|
280,830
|
|
2023
|
|
|
300,248
|
|
Thereafter
|
|
|
6,248,279
|
|
Total
|
|
|
39,874,642
|
|
Less
discounts
|
|
|
(5,528,985
|
)
|
|
|
$
|
34,345,657
|
|
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 accordance with the terms of the $10M Debentures, of the daily volume-weighted price during the
ten consecutive trading days preceding the date of conversion. Notwithstanding this conversion right, the Holder shall limit conversions
in any given month to certain agreed-upon 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 outstanding principal amount of the $10M Debentures, plus
all accrued and unpaid interest thereon. So long as the $10M Debentures are outstanding, in the event the Company enters into
a Variable Rate Transaction (“VRT”), as defined in the SPA, the Holder may cause the Company to revise the terms of
the $10M Debentures to match the terms of the convertible security issued in such VRT.
In
conjunction with the issuance of the $10M Debentures, the
Company issued two warrants to the Holder to purchase 142,857 and 181,818 shares of the Company’s common
stock at exercise prices of $3.50 and $5.50 per share, respectively, and expiring three years from issuance (the “Initial
Warrants”). The fair value of the Initial Warrants of approximately $1,057,000 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 certain registration rights with respect to any potential shares issued pursuant
to the terms of the SPA, the $10M Debentures, and the Warrants.
Subsequent
to entering into the SPA and related agreements, the Company and the Holder executed an addendum to the SPA whereby the
Holder agreed to that it would not undertake a conversion of all or a portion of the $10M Debentures that would require the Company
to issue more shares than the amount of available authorized shares at the time of conversion, which amount of authorized shares
shall not be less than the current authorized number of 500 million shares of common stock. Such addendum eliminated the requirement
to bifurcate and account for the conversion feature of the $10M Debentures as a derivative.
Based
on the conversion prices of the $10M Debentures in relation to the market value of the Company’s common stock, the $10M
Debentures provided the Holder with a beneficial conversion feature, as the embedded conversion option was in-the-money on the
commitment date. The intrinsic value of the beneficial conversion feature of approximately $5,570,000 was recorded as a discount
to the carrying amount of the $10M Debentures, with an offset to additional paid-in-capital.
In
May 2019, the Company sold to the Holder an additional $5,000,000 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 each of June and August 2019, the Company sold to the Holder an
additional $2,500,000 of convertible debentures, totaling $5,000,000, that mature two years from issuance, with a 7% issue discount,
resulting in aggregate net proceeds to the Company of $4,650,000 (the “Two $2.5M Debentures,”
and together with the $5M Debentures, the “Additional $10M Debentures”).
The
terms of the Additional $10M Debentures are consistent with the terms of the $10M Debentures, except that (i) no interest
shall accrue on the Two $2.5M Debentures, (ii) the issue discount on the Two $2.5M Debentures is 7%, compared to
1% on the $10M Debentures and the $5M Debentures, and (iii) other small variations, most notably a cap on the conversion
price. The SPA, registration rights agreement, and addendum to the SPA were all amended and restated to incorporate the Additional
$10M Debentures.
As
part of issuance of the Additional $10M Debentures, the Company issued three-year warrants to the Holder to purchase 550,000
and 300,000 shares of common stock exercise prices of $3.00 and $5.00 per share, respectively (the “Additional
Warrants”). The fair value of the Additional Warrants of approximately $1,148,000 was recorded as a discount to the
carrying amount of the Additional $10M Debentures.
Based
on the conversion prices of the Additional $10M Debentures in relation to the market value of the Company’s common
stock, the Additional $10M Debentures provided the Holder with a beneficial conversion feature, as the embedded conversion
option was in-the-money on the commitment date. The aggregate intrinsic value of the beneficial conversion feature of approximately
$4,235,000 was recorded as a discount to the carrying amount of the Additional $10M Debentures, with an offset to
additional paid-in-capital.
In
November and December 2018, the Holder converted, in two separate transactions, an aggregate of $1,400,000 of principal and approximately
$36,000 of accrued interest into 524,360 shares of common stock at conversion prices of $2.23 and $3.04 per share. In January
2019, the Holder converted, in three separate transactions, an aggregate of $600,000 of principal and approximately $97,000 of
accrued interest into 233,194 shares of common stock at conversion prices ranging from $2.90 to $3.06 per share. In April and
June 2019, the Holder converted, in four separate transactions, an aggregate of $1,750,000 of principal and approximately $181,000
of accrued interest into 923,185 shares of common stock at conversion prices ranging from $1.74 to $2.74 per share. In
July, the Holder converted, in two separate transactions, an aggregate of $2,750,000 of principal and approximately $17,000 of
accrued interest into 2,435,144 shares of common stock at conversion prices of $1.08 and $1.70 per share. In September 2019, the
Holder converted $2,400,000 of principal and approximately $64,000 of accrued interest into subscriptions on 3,206,816 shares
of common stock at a conversion price of $0.77 per share.
During
the nine months ended September 30, 2019, amortization of the beneficial conversion features, after adjustment for the conversions,
approximated $4,646,000; amortization of the discounts from the Initial Warrants and Additional Warrants (together, the
“Total Warrants”) approximated $913,000; and the amortization of original issue discounts approximated $107,000.
This amortization was charged to interest expense. Additionally, accrued interest expense for such period approximated $421,000.
At
September 30, 2019, the aggregate outstanding principal balance on the $10M Debentures and the Additional $10M Debentures
(together, the “$20M Debentures”) was $11,100,000. Also on such date, the unamortized balances of the
beneficial conversion feature, the Total Warrants discount, and original issue discounts were approximately $3,637,000,
$1,201,000, and $66,000, respectively. Accordingly, at September 30, 2019, the carrying value of the $20M
Debentures was approximately $5,878,000.
At
December 31, 2018, the outstanding principal balance on the $10M Debentures was $8,600,000. Also on such date, the unamortized
balances of the beneficial conversion feature, Initial Warrants discount, and original issue discounts were approximately $4,048,000,
$966,000, and $91,000, respectively, and accrued and unpaid interest was approximately $62,000. Accordingly, at December 31, 2018,
the carrying value of the $10M Debentures was approximately $3,557,000.
NOTE
13 – EQUITY
Preferred
Stock
In
January 2018, all 500,000 shares of subscribed Series A convertible preferred stock then outstanding were converted into
970,988 shares of common stock at a conversion price of $0.55 per share. The Company recorded a non-cash loss on conversion of
approximately $34,000 based on the market value of the common stock on the conversion date.
Common
Stock
During
the nine months ended September 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 nine months ended September 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 nine months ended September 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.
In August 2019, the Company
granted 108,820 shares of common stock to employees at weighted average price of $1.78, or an aggregate value of approximately
$194,000.
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 nine months ended September 30, 2019, the holder
of the $20M Debentures converted $7,500,000 of principal and approximately $359,000 of accrued interest into
3,591,523 shares of common stock and subscriptions on 3,206,816 shares of common stock.
As
further disclosed in Note 14 – Stock Options, during the nine months ended September 30, 2019 and 2018, 417,352
and 602,000 shares of common stock, respectively, were issued in connection with the exercise of stock options.
As
further disclosed in Note 15 – Warrants, during the nine months ended September 30, 2019 and 2018, warrants to purchase
686,104 and 2,057,462 shares of common stock were exercised.
Common
Stock Issuance Obligations
At
September 30, 2019, the Company was obligated to issue (i) 2,644,456 shares of common stock, valued at approximately $414,000,
in connection with the exercise of stock options, (ii) 3,206,816 shares of common stock, valued at approximately $2,464,000, with
respect to the September 2019 conversion of a portion of the $20M Debentures, as previously disclosed in Note 12 – Debentures
Payable, and (iii) 752,260 shares of common stock, valued at $2,080,000, as part of the purchase price of MediTaurus,
as previously disclosed in Note 3 – Acquisitions. These shares are expected to be issued in the fourth
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.
Amended
and Restated 2018 Stock Award and Incentive Plan
In
August 2019, the Company’s board of directors approved the Amended and Restated 2018 Stock Award and Incentive Plan (the
“Incentive Plan”), based on the board’s belief that awards authorized under the Incentive Plan provide incentives
for the achievement of important performance objectives and promote the long-term success of the Company. In September 2019, the
Incentive Plan was approved by the stockholders at the Company’s annual stock-holders meeting.
The
2018 Plan is an omnibus plan, authorizing a variety of equity award types as well as cash and long-term incentive awards. The
Incentive Plan amends and restates the Company’s 2018 Stock Award and Incentive Plan (the “Original Plan”),
which was approved by the board of directors in July 2018 but never presented to stockholders for approval. Any grants made under
the Original Plan prior to the approval date of the Incentive Plan shall continue to be governed by the terms of the Original
Plan.
The
Incentive Plan authorizes a broad range of awards, including stock options, stock appreciation rights, restricted stock, deferred
stock, dividend equivalents, performance shares, cash-based performance awards, and other stock-based awards. Such awards can
be granted to employees, non-employee directors and other persons who provide substantial services to the Company and its affiliates.
Nothing in the Incentive Plan precludes the payment of other compensation to officers and employees, including bonuses based upon
performance, outside of the Incentive Plan.
An
aggregate of 40,000,000 shares are reserved for delivery to participants, and may be used for any type of award under the Incentive
Plan. Shares actually delivered in connection with an award will be counted against such number of reserved shares. Shares will
remain available for new awards if an award under the Incentive Plan expires, is forfeited, canceled, or otherwise terminated
without delivery of shares or is settled in cash. Each award under the Incentive Plan is subject to the Company’s claw back
policy in effect at the time of grant of the award.
The
board of directors may amend, suspend, discontinue, or terminate the Incentive Plan or the authority to grant awards thereunder
without stockholder approval, except as required by law or regulation or under rules of the stock exchange, if any, on which the
Company’s stock may then be listed. Unless earlier terminated, grants under the Incentive Plan will terminate ten years
after stockholder approval of the Incentive Plan, and the Incentive Plan will terminate when no shares remain available and the
Company has no further obligation with respect to any outstanding award.
NOTE
14 – STOCK OPTIONS
During
the nine months ended September 30, 2019, the Company granted
options to purchase 900,000 shares of common stock, expiring four and five years from their grant dates, with exercise
prices ranging from $0.99 to $1.95 per share. During
the same period in 2018, the Company granted five-year options to purchase 2,300,000 shares of common stock at exercise prices
ranging from $0.14 to $2.65 per share.
The fair values of the aforementioned options
granted in 2019 and 2018 of approximately $876,000 and $2,102,000, respectively, are being amortized over their vesting periods,
of which approximately $101,000 and $1,743,000 was amortized at September 30, 2019 and 2018, respectively.
During
the nine months ended September 30, 2019, options to purchase 3,585,000 shares of common stock were exercised at exercise
prices ranging from $0.08 to $0.77 per share. At September 30, 2019 ,
2,644,456 shares of common stock related to these exercises had yet to be issued by the Company as previously disclosed in Note
13 – Equity under the section entitled Common Stock Issuance Obligations. Accordingly, such shares were reflected
within Common Stock Subscribed But Not Issued on the September 30, 2019 balance sheet. Of the options exercised
in 2019, 2,285,000 were exercised on a cashless basis with the exercise prices paid via the surrender of 523,192
shares of common stock.
During
the nine months ended September 30, 2018, options to purchase 700,000 shares of common stock were exercised at exercise prices
ranging from $0.08 to $0.63 per share. Of the options exercised in 2018, 400,000 were exercised on a cashless basis with the exercise
price paid via the surrender of 98,000 shares of common stock.
During the nine months ended
September 30, 2019 and 2018, options to purchase 80,000 and 300,000, respectively, were forfeited, resulting
in a reduction of amortization of approximately $170,000 in 2019, and zero in 2018.
Stock
options outstanding and exercisable as of September 30, 2019 were:
Exercise
Price
|
|
|
Shares
Under Option
|
|
|
Remaining
|
|
per
Share
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life
in Years
|
|
$
|
0.080
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
0.22
|
|
$
|
0.130
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
0.75
|
|
$
|
0.140
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
0.25
|
|
$
|
0.140
|
|
|
|
550,000
|
|
|
|
550,000
|
|
|
|
1.25
|
|
$
|
0.330
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
1.44
|
|
$
|
0.450
|
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
2.01
|
|
$
|
0.630
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
2.25
|
|
$
|
0.770
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
3.25
|
|
$
|
0.900
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
3.62
|
|
$
|
0.950
|
|
|
|
50,000
|
|
|
|
10,000
|
|
|
|
3.25
|
|
$
|
0.992
|
|
|
|
300,000
|
|
|
|
-
|
|
|
|
4.99
|
|
$
|
1.350
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
3.83
|
|
$
|
1.950
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
3.75
|
|
$
|
2.320
|
|
|
|
220,000
|
|
|
|
100,000
|
|
|
|
3.95
|
|
$
|
2.450
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
3.23
|
|
$
|
2.500
|
|
|
|
100,000
|
|
|
|
50,000
|
|
|
|
3.91
|
|
$
|
2.650
|
|
|
|
200,000
|
|
|
|
150,000
|
|
|
|
3.99
|
|
$
|
2.850
|
|
|
|
75,000
|
|
|
|
18,750
|
|
|
|
3.20
|
|
$
|
2.850
|
|
|
|
100,000
|
|
|
|
25,000
|
|
|
|
4.20
|
|
$
|
3.000
|
|
|
|
25,000
|
|
|
|
12,500
|
|
|
|
4.21
|
|
$
|
3.725
|
|
|
|
200,000
|
|
|
|
50,000
|
|
|
|
4.19
|
|
|
|
|
|
|
5,545,000
|
|
|
|
4,091,250
|
|
|
|
|
|
NOTE
15 – WARRANTS
During
the nine months ended September 30, 2019, in conjunction with the Additional $10M Debentures previously disclosed in Note
12 – Debentures Payable, the Company issued three-year warrants to purchase 550,000 and 300,000 shares of
its common stock at exercise prices of $3.00 and $5.00 per share, respectively. The fair value of
these warrants at issuance approximated $1,148,000, with approximately $187,000 of this amount amortized to interest
expense during the period and the remainder to be amortized over the two-year term of the Additional $10M 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 $294,000 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.
In
July 2018, the Company issued stand-alone warrants to purchase 125,000 shares of common that expire three years from issuance.
The warrants have an exercise price of $1.71 per share, and a fair value of approximately $139,000 which was charged to expense
on the issuance date.
During
the nine months ended September 30, 2018, the Company issued warrants to purchase 7,209,974 shares of common stock at exercise
prices ranging from $0.20 to $4.30 per share. Of these warrants, (i) 1,000,000 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 $1,354,000 which was charged to compensation expense during the period, (ii) 987,500 three-year warrants
were issued in conjunction with promissory notes, at a fair value of approximately $1,710,000 which was charged
to interest expense during the period, and (iii) 5,222,474 warrants were issued as part of the sale of common stock, expiring
three and five years from issuance, at a fair value at issuance of approximately $8.4 million which was charged
to Additional Paid-In Capital.
During
the nine months ended September 30, 2019 and 2018, warrants to purchase 686,104 and 2,057,462 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 September 30, 2019 and 2018,
warrants to purchase 11,270,107 and 9,397,823 shares of common stock, respectively, were outstanding at exercise
prices ranging from $0.15 to $5.50 per share in 2019 and $0.12 to $4.30 per share in 2018.
NOTE
16 – REVENUES
For
the nine months ended September 30, 2019 and 2018, the Company’s revenues were comprised of the following major categories:
|
|
Nine
months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Real
estate
|
|
$
|
5,250,084
|
|
|
$
|
4,570,194
|
|
Management
|
|
|
1,963,205
|
|
|
|
1,156,547
|
|
Supply
procurement
|
|
|
2,830,555
|
|
|
|
2,045,467
|
|
Licensing
|
|
|
1,230,366
|
|
|
|
529,268
|
|
Product
sales
|
|
|
60,839
|
|
|
|
-
|
|
Product
sales to related party
|
|
|
29,029,249
|
|
|
|
-
|
|
Other
|
|
|
47,893
|
|
|
|
110,382
|
|
Total
revenues
|
|
$
|
40,412,191
|
|
|
$
|
8,411,858
|
|
For
the nine months ended September 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 To Related Party shown in the table
above represents the total revenues from these transactions with GenCanna through September 30, 2019. Excluding the revenues
from GenCanna, two clients represented 82% of revenues during this period.
For
the nine months ended September 30, 2018, these same two clients comprised 72% of total revenues.
NOTE
17 – RELATED PARTY TRANSACTIONS
During
the nine months ended September 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 $33.2 million due from GenCanna as a receivable from a related party, with
approximately $29.0 million recognized as revenue from a related party for the nine months ended September 30, 2019, and
approximately $4.2M recorded under Unearned Revenue From Related Party on the balance sheet. Upon payment of
the receivable balance by GenCanna, the amount in Unearned Revenue From Related Party will be recognized as
revenue.
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
September 2019, the Company granted five-year options to purchase 100,000 shares of common stock to each of the Company’s
three independent board members at an exercise price of $0.99. The aggregate fair value of these options of approximately $191,000
is being amortized over the six-month vesting period, of which approximately $92,000 was amortized at September 30, 2019.
In
January 2018, the Company granted options to purchase 1.45 million shares of common stock to the Company’s board members
at exercise prices ranging from $0.14 to $0.77 and expiring between December 2020 and December 2022. The aggregate fair value
of these options of approximately $480,000 was fully amortized by June 30, 2018.
During
the nine months ended September 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.
In
January 2018, options to purchase 200,000 shares of common stock were forfeited by two board members. No options were forfeited
by board members in 2019.
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 nine months ended September 30, 2019 and 2018, expenses incurred
under these leases approximated $117,000 and $16,000, respectively.
The
outstanding Due To Related Parties balances at September 30, 2019 and December 31, 2018 of approximately $416,000
and $276,000, respectively, were comprised of amounts owed of approximately (i) $100,000 and $81,000, respectively,
to the Company’s CEO and CFO, (ii) $256,000 and $135,000, respectively, to two companies partially owned by these
officers, and (iii) $60,000 in both periods to two stockholders of the Company. Such amounts owed are not subject to repayment
schedules.
The
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 September 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 four finance leases. These leases contain rent holidays and customary
escalations of lease payments for the type of facilities being leased. The Company recognizes rent expense on a straight-line
basis over the expected lease term, including cancelable option periods which the Company fully expects to exercise. Certain leases
require the payment of property taxes, insurance and/or maintenance costs in addition to the rent payments.
The
details of the Company’s operating lease agreements are as follows:
|
●
|
Delaware
– 4,000 square feet of retail space in a multi-use building under a five-year lease that commenced in October 2016 and
contains a five-year option to extend the term. The Company developed the space into a cannabis dispensary which is subleased
to its cannabis-licensed client.
|
|
|
|
|
●
|
Delaware
– a 100,000 square foot warehouse leased in March 2019 that the Company 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, with an option to extend the term for an additional five-year period.
|
|
|
|
|
●
|
Maryland
– a 2,700 square foot 2-unit apartment under a lease that expires in July 2020 with an option to renew for a two-year
term.
|
The
Company leases machinery and office equipment under finance leases that expire in February 2022 through June 2024 with such terms
being a major part of the economic useful life of the leased property.
The
components of lease expense for the nine months ended September 30, 2019 were as follows:
Operating lease cost
|
|
$
|
585,940
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
14,914
|
|
Interest on lease
liabilities
|
|
|
4,188
|
|
Total finance
lease cost
|
|
$
|
19,102
|
|
The
weighted average remaining lease term for operating leases is 9.5 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 September 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
|
|
$
|
141,156
|
|
|
$
|
9,603
|
|
2020
|
|
|
917,444
|
|
|
|
38,412
|
|
2021
|
|
|
1,008,227
|
|
|
|
38,412
|
|
2022
|
|
|
949,535
|
|
|
|
27,123
|
|
2023
|
|
|
910,166
|
|
|
|
23,201
|
|
Thereafter
|
|
|
5,139,851
|
|
|
|
3,229
|
|
Total
lease payments
|
|
|
9,066,379
|
|
|
$
|
139,980
|
|
Less:
imputed interest
|
|
|
(2,727,246
|
)
|
|
|
(18,778
|
)
|
|
|
$
|
6,339,133
|
|
|
$
|
121,202
|
|
Terminated
Employment Agreement
An
employment agreement which commenced in 2012 with Thomas Kidrin, the former CEO of the Company, that provided Mr. Kidrin
with salary, car allowances, stock options, life insurance, and other employee benefits, was terminated by the Company in 2017.
At September 30, 2019 and December 31, 2018, the Company maintained an accrual of approximately $1,043,000 for any amounts
that may be owed under this agreement, although the Company contends that such agreement is not valid and no amount is due.
In
July 2019, Mr. Kidrin, also a former director of the Company, filed a complaint in the Massachusetts Superior Court, that alleges
the Company failed to pay all wages owed to him and breached the employment agreement, and requests multiple
damages, attorney fees, costs, and interest. The Company has moved to dismiss certain counts of the complaint and has asserted
counterclaims against Mr. Kidrin alleging breach of contract, breach of fiduciary duty, money had and received, and unjust enrichment.
The Company believes that the allegations in the complaint are without merit and intends to vigorously defend
this matter and prosecute its counterclaims.
Maryland
Acquisition
As
previously disclosed in Note 3 – Acquisitions, the sellers of Kind have attempted to renegotiate the terms of the
MOU, alleging that the MOU is not an enforceable agreement, despite the MOU containing all the definitive material terms with
respect to the acquisition transaction and confirming the management and lease agreements. The Company engaged with the sellers
in a good faith attempt to reach updated terms acceptable to both parties, but the non-reciprocation of the sellers resulted in
an impasse. Additionally, both parties through counsel further sought to resolve the impasse, however such initiative resulted
in both parties commencing legal proceedings. For further information, see Note 19 – Subsequent Events.
NOTE
19 – SUBSEQUENT EVENTS
On
October 1, 2019, the Illinois Department of Financial & Professional Regulation approved the Company’s acquisition of
the KPGs and Mari-IL. Effective on such date, (i) the purchase price of 1,000,000 shares of the Company’s common stock was
paid to the selling parties, and (ii) the KPGs and Mari-IL became wholly-owned subsidiaries of the Company to be consolidated
into the Company’s financial statements.
During
the month of October 2019, the Company issued three-year warrants
to purchase 300,000 shares of common stock at an exercise price of $1.37 per share for services rendered. Also
during this month, the Company granted to employees for services (i) 24,074 shares of common stock, and (ii) five-year options
to purchase 500,000 shares of common stock at an exercise price of $0.71 per share.
In
October 2019, the Company closed on the purchase of a 9,000 square foot building in Annapolis, MD. The purchase price of approximately
$1.7 million was paid with the proceeds from a $2.0 million promissory note issued by the Company to an unaffiliated third party
and secured by the property. The note, which matures in January 2020, provides the payee with origination fees aggregating 5%
of the principal, and bears interest at the rate of 2% per month commencing 90 days from the start of the note. The Company intends
to develop the property into a medical marijuana dispensary to be leased to Kind.
On
November 13, 2019, Kind commenced an action in the Circuit Court for Washington County, MD against the Company alleging, inter
alia, breach of contract, breach of fiduciary duty and unjust enrichment, and seeking a declaratory judgment, injunctive relief,
an accounting and damages in excess of $75,000. On November 15, 2019, the Company filed counterclaims against Kind and, as plaintiffs,
the Company commenced an action against the Kind sellers alleging breach of contract with respect to the MOU and the management
agreement, unjust enrichment, promissory estoppel/detrimental reliance, and fraud in the inducement. The Company seeks a declaratory
judgement that the MOU is an enforceable contract, specific performance of such contact, and the establishment of a constructive
trust for the Company’s benefit.
Both
parties brought motions for a temporary restraining order and a preliminary injunction. On November 21, 2019, the Court denied
both parties’ motion for a temporary restraining order. In its opinion, the Court specifically noted that, contrary to Kind’s
allegations, the management agreement and lease “appear to be independent, valid and enforceable contracts.” Currently,
each party’s preliminary injunction motion is pending before the Court. The Company believes that its claims for breach
of contract with respect to the MOU and the management agreement, unjust enrichment, promissory estoppel/detrimental reliance,
and fraud in the inducement are meritorious and that Kind’s claims against the Company are without merit. The Company intends
to aggressively prosecute and defend the action.
Item
2. Management’s Discussions and Analysis of Financial Condition and Results of Operations
Forward
Looking Statements
When
used in this form 10-Q and in future filings by the Company with the Commission, the words or phrases such as “anticipate,”
“believe,” “could,” “should,” “estimate,” “expect,” “intend,”
“may,” “plan,” “predict,” “project,” “will” or similar expressions
are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995. Readers are cautioned not to place undue reliance on any such forward looking statements, each of which speak only
as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release
the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events
or circumstances occurring after the date of such statements.
These
forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be
materially different. These factors include, but are not limited to, changes that may occur to general economic and business conditions;
changes in current pricing levels that we can charge for our services or which we pay to our suppliers and business partners;
changes in political, social and economic conditions in the jurisdictions in which we operate; changes to laws and regulations
that pertain to our products and operations; and increased competition.
The
following discussion should be read in conjunction with the unaudited financial statements and related notes which are included
under Item 1 of this report.
We
do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.
Overview
General
MariMed
Inc. (“we”, “our”, “us”, “MariMed” or the “Company”) is a leader in
the legal cannabis and hemp industries. The Company’s stock is quoted on the OTCQX market under the ticker symbol,
MRMD.
We
are industry experts in the development, operation, management and optimization of cannabis cultivation, production and dispensing
facilities. These facilities, located in multiple states, are leased to our clients who are entities that have been awarded legal
and medical marijuana licenses by multiple states.
Since
entering the cannabis industry, we have demonstrated an excellent track record in managing state-of-the-art, regulatory-compliant
facilities for the cultivation, production, and dispensing of legal cannabis and cannabis-infused products. We provide industry-leading
expertise and consultative services in all aspects of cannabis licensing procurement, including ongoing management oversight or
real estate services to five independent operations in five states – Delaware, Illinois, Maryland, Nevada and Massachusetts.
We
acquire land and/or real estate for the purpose of developing state-of-the-art, regulatory-compliant legal cannabis facilities.
These facilities are designed to be models of excellence in horticultural principals, cannabis production, product development
and dispensary operations. Along with operational oversight, we provide our clients with legal, accounting, human resources, and
other corporate and administrative services.
We
have secured, on behalf of our 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. We have client operating facilities that are opened or under development in the cities of Wilmington, Lewes, and
Milford in Delaware; the cities of Anna and Harrisburg in Illinois; Clark county in Nevada; Arundel county and the city of Hagerstown
in Maryland; and the cities of New Bedford and Middleborough in Massachusetts. In total, we have developed in excess of 300,000
square feet of seed-to-sale cannabis facilities.
In
2018, we began a transition from being a management and advisory firm that provides cannabis licensing, operational consulting
and real estate services, to being primarily a direct owner of cannabis licenses and operator of seed-to-sale operations, dedicated
to the improvement of health and wellness through the use of cannabinoids and cannabis products. We have implemented
a plan to consolidate the ownership of our client operating entities under the MariMed banner.
To
date, the acquisitions of clients in Massachusetts and Illinois have been completed, with the remaining clients under contract
and in various stages of completion, as discussed below. Our acquisition efforts are subject to each particular state’s
laws governing cannabis license ownership, and accordingly, there is no assurance that we will be successful in fully implementing
our plan. Once the consolidation is completed, we will own,
manage and operate cultivation, manufacturing and retail dispensary operations in six states. Moreover, we plan to leverage our
success in providing management oversight in these markets to expand into other states, while focusing on regulatory compliance,
efficiency and product performance.
Recognizing
the emergence of the global hemp market following the enactment of the 2018 U.S. Farm Bill, in late 2018 we purchased $30
million of subordinated secured convertible debentures (the “GC Debentures”) from GenCanna Global USA, Inc., a leading
producer and distributor of industrial hemp, CBD formulations, and hemp genetics (“GenCanna”). In February 2019, we
converted the GC Debentures, plus accrued interest, into a 33.5% ownership interest in GenCanna on a fully diluted basis. Additionally,
the Company established a wholly owned subsidiary, MariMed Hemp Inc., in January 2019 to market and distribute hemp-derived CBD
products across several vertical markets.
We
have also developed precision-dosed cannabis- and hemp-infused products designed for specific medical conditions and related symptoms.
These products are licensed under Company-owned brands such as Kalm Fusion™, Betty’s Eddies™, Nature’s
Heritage™ and Florance™, in the form of dissolvable strips, tablets, powders, microwaveable popcorn, fruit chews,
and with more varieties in development. The Company also sublicenses several top brands including Lucid Mood™ disposable
vape pens, and DabTabs™ revolutionary 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™. We plan to continue licensing the best brands and products in the industry for distribution through our owned and
client owned dispensaries across the country.
Over
our short history, we have developed an excellent reputation for strong management in the cannabis industry. As
a management company, our clients have thrived and succeeded in their respective markets. Our goal is to continue
this success as we transition from a manager and advisor to an owner of cannabis licenses and an operator of cannabis
businesses. Our strengths can be summarized as follows:
Professional
Management
We
have had considerable success writing award-winning applications for clients applying for licenses in new and established legal
cannabis states; creating and developing defined business, operating and security plans; sourcing real estate for cannabis facilities
in receptive municipalities; and raising capital to purchase and develop facilities. These skills are important as we expand
our footprint into new states on a direct ownership basis.
Development
of State-of-the-Art Cannabis Facilities and Operations
We
have constructed numerous cannabis cultivation, production, and dispensary facilities in several states utilizing and developing
industry “best practices” in all of our facilities, and our clients’ seed-to-sale operations in multiple states
are examples of operational excellence under our proven management processes and practices.
Cannabis
Brand Creation
We
have developed unique brands of precision-dosed cannabis-infused products which are currently licensed and distributed in cannabis-legal
states. Going forward, we intend to continue expanding both our brand portfolio and the licensing of our
branded products into additional cannabis-legal states.
Investment
in Hemp Production, Branding, and Distribution
Our
direct ownership in GenCanna, which we believe will become one of the largest hemp producers in the United States by the year
2020, will help ensure we have access to a safe and reliable source of hemp-based CBD. The market for hemp-based CBD products
is expected to grow significantly over the next several years.
With the creation of the wholly-owned
subsidiary MariMed Hemp in early 2019, we have started to make inroads into the branding and distribution of hemp-derived
CBD products. With our acquisition in February 2019 of MediTaurus and its Florance™ brand, we are starting
to leverage the GenCanna relationship and grow the revenue base for hemp-derived CBD products.
Technological
and Scientific Innovation
We
are diligent in identifying and reviewing the latest sciences and processes applicable to the cultivation, distillation, production,
packaging, securing, and distribution of cannabis and cannabis-infused products. We have obtained the highest quality cannabis
strains and genetics. We are at the leading edge of patient education and physician outreach for cannabis, and we seek strategic
relationships with companies that are at the forefront of extraction and distillation.
Consolidation
Plans
Our
strategic plan involves the acquisition of the business
operations and licenses of entities to which we provide advisory and real estate services. The following is an overview
of the consolidation process:
Massachusetts
We
successfully converted ARL Healthcare Inc. (“ARL”),
our cannabis-licensed client, from a non-profit entity to a for-profit corporation of which we are the sole shareholder.
We now own ARL and its cannabis licenses for cannabis cultivation, production and dispensing, and as a licensee, we
will have priority to obtain incremental licenses as they are made available by the state.
We
recently completed construction of a 70,000 square foot state-of-the-art
cultivation and production facility for ARL in New Bedford within our 138,000 square foot facility purchased in 2017. We
also own a 22,700 square foot building in Middleborough in which we developed a 10,000 square foot dispensary. Both
locations have been approved by the state to commence full operations in December 2019. Furthermore, subject to regulatory
approval, we intend to open two more dispensaries in the Boston area by the end of 2020.
Maryland
In
December 2018, we entered into a memorandum of understanding (“MOU”) to acquire Kind Therapeutics USA Inc. (“Kind”),
our cannabis-licensed client that holds licenses for the cultivation, production, and dispensing of medical cannabis. The MOU
provides for a total purchase price of $6.3 million in cash, 2,500,000 shares of our common stock, and other consideration. The
acquisition is subject to the approval by the Maryland Medical Cannabis Commission, which approval was not expected prior to October
2020.
Also in December 2018, MariMed Advisors Inc, our wholly owned subsidiary, and
Kind entered into a management agreement pursuant to which we provide Kind with comprehensive management services in
connection with the business and operations of Kind, and Mari Holdings MD LLC, our majority-owned subsidiary, entered into a
20-year lease with Kind for its utilization of the Company’s 180,000 square foot cultivation and production facility in
Hagerstown, MD. Additionally, in October 2019, we purchased a 9,000 square foot building in Anne Arundel County for the
development of a dispensary which would be leased to Kind.
Recently,
the sellers of Kind have attempted to renegotiate the terms of the MOU. Even though the MOU contains all the definitive material
terms with respect to the acquisition transaction and confirms the management and lease agreements, the selling parties now allege
that the MOU is not an enforceable agreement. We engaged with the sellers in good faith in an attempt to reach updated
terms acceptable to both parties, however the sellers failed to reciprocate in good faith, resulting in an impasse. Incrementally,
both parties through counsel further sought to resolve the impasse, however such initiative resulted in both parties commencing
legal proceedings. For further information, see Part II, Item 1. Legal Proceedings in this report.
Illinois
In
October 2019, the Illinois Department of Financial & Professional Regulation approved our acquisition of the ownership
interests of KPG of Anna LLC and KPG of Harrisburg LLC, the Company’s two cannabis-licensed clients that operate Company-built
and owned medical marijuana dispensaries in the state of Illinois (both entities collectively, the “KPGs”). As part
of this transaction, we also acquired the selling parties’ interests in Mari Holdings IL LLC, our subsidiary
which owns the real estate in which the KPGs’ dispensaries are located. Effective October 1, 2019, 100% of the operations
of these entities will be consolidated into our financial statements. Additionally, the state is in the process of legalizing
adult-use cannabis which we believe will permit us to expand into two additional locations when such legalization
occurs.
Nevada
In
November 2018, we issued a letter of intent to acquire 100% of the ownership interests of The Harvest Foundation LLC, our
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 approval of the state cannabis commission
which is pending. Harvest holds both medical and adult-use cannabis licenses, and operates in approximately 10,000 square
feet of an industrial building that we lease and have built out into a cannabis cultivation facility. We are currently
awaiting state approval of the transaction which we expect to receive by the end of the year.
Delaware
Delaware
currently is a not-for-profit state with regard to the ownership of cannabis licenses. We provide comprehensive management
and real estate services to First State Compassion Center (“FSCC”), our cannabis-licensed client which was
awarded Delaware’s first ever seed-to-sale medical cannabis license and owns two out of the four statewide licenses.
FSCC
operates out of our 47,000 square foot seed-to-sale facility in Wilmington, and a 4,000 square foot retail location
in Lewes that we lease. We has recently signed a lease with an option to purchase a 100,000 square foot building in Milford,
with plans to build another cultivation and production facility to serve the state’s growing patient count.
The state is expected to allow
“for-profit” ownership of cannabis licenses in the near future, at which time we will seek to acquire
FSCC and obtain ownership of the licenses and operations.
Rhode
Island
Rhode
Island currently is a not-for-profit state with regard to the ownership of cannabis licenses. We are in continuing
negotiations to purchase the real estate which is leased to our cannabis-licensed client, the Thomas C. Slater Compassion
Center (“Slater”), and to acquire, subject to state approval, the management company that oversees Slater’s
operations. The entity that owns the real estate and the management company are both partially owned by the Company’s
CEO and CFO. If these transactions are completed, we will generate real estate and management fees until the state
allows “for-profit” ownership, which is expected to occur in 2020. At that time, we will seek to acquire Slater’s
cannabis licenses and operations.
New
Operations – Completed Transactions & Current Activities
GenCanna
Global Inc.
In
late 2018, we purchased the GC Debentures from GenCanna. In February 2019, we converted the GC Debentures plus accrued
interest through the conversion date into common shares of GenCanna representing a 33.5% ownership interest in GenCanna on a fully
diluted basis, and our CEO, Robert Fireman, was appointed to GenCanna’s board of directors.
In
December 2018, the 2018 U.S. Farm Bill (the “Farm Bill”) became law in the United States. Under the Farm Bill, industrial
and commercial hemp is no longer classified as a Schedule I controlled substance, and explicitly allows interstate hemp commerce
which will enable its legal transport and delivery across state lines.
GenCanna,
based in Winchester, Kentucky, focuses on growing hemp with superior genetics and creating hemp-based products in accordance with
the highest quality standards such as GMP (Good Manufacturing Practices) to ensure that wholesalers and consumers receive a consistent
high-quality product to meet their wellness needs. GenCanna has also become a thought leader in the hemp industry, working closely
with federal and local governmental regulatory authorities.
In
2019 GenCanna has expanded acreage of hemp farming and production of compliant CBD oils, isolates, and infused products, making
it one of the largest producers of these products in the country.
MariMed
Hemp
To
leverage its investment in GenCanna, we established MariMed Hemp Inc. in January 2019, a wholly-owned subsidiary to develop,
market, and distribute hemp-based CBD brands and products to different classes of retailers and direct to consumers. In addition,
MariMed Hemp will be developing and acquiring top quality genetics and biomass to resell to growers and processors.
The
rapid growth of legal cannabis and hemp-derived CBD markets presents a global paradigm shift and challenges to medical professionals
and consumers who seek scientific knowledge and research regarding medical cannabis and hemp. Accordingly, in addition to the
aforementioned objectives, one of MariMed Hemp’s priorities will be to provide credible research-based information about
the health benefits of cannabis and hemp to medical providers and their patients, many of whom express a strong and growing appetite
for knowledge on this topic. Armed with this knowledge, such healthcare professionals and consumers will be able to effectively
and safely choose from a broad, and potentially confusing, range of cannabis products.
As
part of our education initiative, we are assembling a Scientific Advisory Board (the “SAB”), that includes
some of the world’s leading scientists and researchers focused on the scientific application of cannabis and hemp for health
and wellness. The SAB’s goals will include the development of strategies to address the most widespread and debilitating
medical and dietary conditions through the utilization of cannabis- and hemp-based therapies.
MediTaurus
To
facilitate our drive for greater science and education, we acquired MediTaurus LLC in June 2019. MediTaurus
was established by Dr. Jokubas Ziburkas a leading authority on hemp-based CBD and the endocannabinoid system. Dr. Ziburkas
holds a PhD in Neuroscience, and currently serves as Associate Professor of Neuroscience at the University of Houston, where his
research is focused on cannabinoid actions in the brain and novel treatments for neurological disorders. He has published
over 20 peer-reviewed articles and book chapters, and is regarded as a thought leader in the global cannabis industry.
MediTaurus
has developed proprietary formulations for hemp-derived CBD,
and currently operates in Lithuania and Texas. Its Florance™ brand, recently launched in Germany, is marketed globally through
the MediTaurus website. Additionally, Dr. Ziburkas has been named the Chief Innovation Officer of MariMed, and
will assist MariMed Hemp in the marketing and distribution of Florance™ and newly-developed products throughout the
United States and Europe.
Pipeline
Transactions
MariMed
is actively pursuing other growth opportunities to expand its asset portfolio in the hemp and cannabis industries. At this
time, there is no assurance that any of these opportunities will materialize.
Corporate
History
The
Company was originally incorporated in the state of Delaware in January 2011 as a wholly-owned subsidiary of Worlds Inc. (formerly
Worlds.com Inc.) under the name Worlds Online Inc. In May 2011, Worlds Inc. spun-off of the Company to its stockholders. At its
inception, the Company operated online virtual environments which did not gain traction with users.
In
early 2014, the Company transitioned its operational focus to the emerging cannabis industry and made its first acquisition
of a cannabis business.
During
the first half of calendar 2017, the Company changed its name to MariMed Inc. and its ticker symbol to MRMD. Also during this
period, the number of authorized shares of the Company’s common and preferred stock were increased to 500 million and 50
million, respectively.
In
July 2017, Robert Fireman was named as the Company’s CEO and President, and Jon R. Levine as the CFO, Treasurer, and Secretary.
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.
In
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.
In
August 2018, the Company purchased a 23% ownership interest in CVP Worldwide LLC d/b/a Sprout, an entity that provides a customer
relationship management and marketing platform, branded under the name Sprout, specifically designed for companies in the cannabis
industry.
During
the period from 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.
During
the period September 2018 to November 2018, in a series of investments, the Company purchased an aggregate of $30 million of subordinated
secured convertible debentures of GenCanna. In February 2019, the Company converted the debentures plus accrued interest through
the conversion date into a 33.5% equity interest on a fully diluted basis.
In
October 2018, the Company entered into a purchase agreement to acquire 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”), and the KPGs’ owners’ interests in Mari Holdings IL LLC, the Company’s
subsidiary that owns the real estate where the KPGs’ two dispensaries are located. On October 1, 2019, the Illinois Department
of Financial & Professional Regulation approved the Company’s acquisition of the KPGs and Mari-IL. As of such date,
the KPGs and Mari-IL are wholly-owned subsidiaries of the Company.
In
October 2018, the Company’s cannabis-licensed client in Massachusetts, ARL Healthcare Inc. (“ARL”), filed a
plan of entity conversion with the state to convert from a non-profit entity to a for-profit corporation, 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. In November 2018, the Company received written confirmation of state approval
of the conversion plan from the state, making ARL a wholly-owned subsidiary of the Company.
In
November 2018, the Company issued a letter of intent to acquire The Harvest Foundation LLC, the Company’s client awarded
a cannabis license for cultivation in the state of Nevada. In August 2019, the parties entered into a purchase agreement governing
the transaction. The acquisition is conditional upon state approval, which is expected to occur by the end of the year.
In
December 2018, the Company made a $500,000 investment in Iconic Ventures Inc. which has developed DabTabs™, a revolutionary
product that consists of a convenient portable tablet that delivers precise dosing and acts as a storage system for full spectrum
cannabinoid vaporization. Additionally, the Company secured the exclusive distribution rights for six states and is in the process
of beginning distribution in the state of Maryland.
In
December 2018, the Company executed a memorandum of understanding (“MOU”) to acquire Kind Therapeutics USA
Inc. (“Kind”), its client in the state of Maryland that holds licenses for the cultivation, production, and
dispensing of medical cannabis. The MOU provides for a total purchase price of $6.3 million in cash, 2,500,000 shares of the
Company’s common stock, and other consideration. The transaction is subject to the approval by the Maryland Medical
Cannabis Commission, which approval was not expected prior to October 2020. Recently, the sellers of Kind have attempted to
renegotiate the terms of the MOU. Even though the MOU contains all the definitive material terms with respect to the
acquisition transaction and confirms certain management and lease agreements, the selling parties now allege that the MOU is
not an enforceable agreement. The Company engaged with the sellers in good faith in an attempt to reach updated terms
acceptable to both parties, however the sellers failed to reciprocate in good faith, resulting in an
impasse. Incrementally, both parties through counsel further sought to resolve the impasse, however such initiative
resulted in both parties commencing legal proceedings. For further information, see Part II, Item 1. Legal Proceedings
in this report.
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 $300,000 construction loan in connection
with the buildout of MHWC’s proposed dispensary location. 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 20% ownership of MHWC. 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.
In
January 2019, the Company converted a $250,000 note receivable from Chooze Corp., an entity that develops CBD- and THC-infused
products without debilitating side effects, into a 2.7% ownership interest in the entity.
In
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. During the quarter
ended September 30, 2019, MariMed Hemp launched Hemp Engine™, a store-within-a-store turnkey distribution platform of CBD-based
products for retailers.
In
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. In
July 2019, the Company extended an additional loan of $230,000 to Atalo.
In
May 2019, the Company issued 500,000 shares of its common stock in exchange for an 8.95% interest in Terrace Inc., a Canadian
entity that develops and acquires international cannabis assets.
In
June 2019, the Company executed a purchase agreement to acquire MediTaurus LLC, a company established by Jokubas Ziburkas PhD,
a neuroscientist and 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.
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
August 2019, the Company extended a loan of $250,000 to High Fidelity Inc., a company that owns and operates two seed-to sale
medical marijuana facilities in the state of Vermont, and produces its own line of CBD products.
In
October 2019, the Company closed on the purchase of a 9,000 square foot building in Annapolis, MD which it intends to develop
into a medical marijuana dispensary to be leased to Kind.
Significant
Transactions in the Current Period
During
the nine months ended September 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 U.S. Farm Bill.
The
Company purchased $20.75 million of hemp seed inventory during the nine months ended September 30, 2019,
which the Company sold and delivered to GenCanna for $33.2 million. The
Company provided GenCanna with extended payment terms through December 2019, to coincide with the completion of the seeds’
harvest, although the payment by GenCanna is not contingent upon the success of such harvest or its yield.
As
required by the relevant accounting guidance, the Company has classified the $33.2 million due from GenCanna as a receivable
from a related party, with approximately $29,0 million recognized as revenue from a related party for the nine months ended
September 30, 2019, and approximately $4.2 million recorded under Unearned Revenue From Related Party on the balance
sheet. Upon payment of the receivable balance by GenCanna, the amount in Unearned Revenue From Related Party will
be recognized as revenue.
To
partially fund the seed purchases, the Company borrowed $17.0 million, which is included in Notes Payable on
the balance sheet as of September 30, 2019 and further discussed in Note 11 – Debt.
The
Company continues to explore opportunities to continue such seed sale transactions in the future, however there is no assurance
that such transactions will materialize.
Revenues
Our
revenues are currently comprised of the following primary categories:
Management
– We receive fees for providing comprehensive oversight of our clients’ entire cannabis cultivation, production, and
dispensary operations. Along with this oversight, we provide human resources, legal, accounting, sales, marketing, and reporting
services.
Real
Estate – Our state-of-the-art, regulatory-compliant legal cannabis facilities are leased to our cannabis-licensed clients
over 20-year lease terms. We generate rental income from occupancy, tenant improvements, equipment rentals, and additional rental
income based on the success of the cannabis licensees.
Licensing
– We derive licensing revenue from the sale by the licensees of our branded precision-dosed cannabis-infused products, such
as Kalm Fusion™ and Betty’s Eddies™, to legal dispensaries throughout the country.
Consulting
– We assist third parties in securing cannabis licenses, and provide advisory services in the areas of facility design and
development, and cultivation and dispensing best practices
Supply
Procurement – We have established large volume discounts with top national vendors of cultivation and production supplies
and equipment, which we acquire and resell at competitive prices to our cannabis-licensed clients with a reasonable markup.
Product
Sales – Our direct sales of cannabis, hemp, and products derived from these plants will be classified under this revenue
category. This year, we 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, (ii) the dispensary and wholesale operations of ARL in
Massachusetts and the KPGs in Illinois, and (iii) the Company’s planned cannabis-licensee acquisitions in
Maryland and Nevada.
Expenses
We
classify our expenses into three broad categories:
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cost
of revenues, which includes the direct costs associated with the generation of our revenues;
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operating
expenses, which include the sub-categories of personnel, marketing and promotion, and general and administrative; and
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non-operating
income and expenses, which include the sub-categories of interest expense, interest income, non-cash losses on debt settlements
equity in earnings of our non-consolidated investments, and other one-one gains or losses.
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Liquidity
and Capital Resources
During
the nine months ended September 30, 2019, we raised $2.6 million from the issuance of common stock, $17.0 million from the issuance
of promissory notes, and $9.6 million from the issuance of convertible debentures. Please refer to the notes accompanying
our condensed consolidated financial statements at September 30, 2019 for further discussion on these transactions.
These
funds will be used to execute on our strategy to become a direct cultivator, producer, and dispenser of cannabis and cannabis-related
products, continue the development of our facilities, and expand our hemp seed wholesale operations and branded licensing business.
We continue to require and negotiate for additional sources of capital, although there can be no assurance that any such capital
will be available on terms that are acceptable to us.
RESULTS
OF OPERATIONS
Three
months ended September 30, 2019 compared to three months ended September 30, 2018
Total
revenues for the three months ended September 30, 2019 increased to approximately $11.2 million from approximately
$3.4 million for the same period in 2018, a more than three-fold increase of approximately $7.8 million.
This substantial growth was primarily due to the 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 (the “Seed Transactions”). The Seed Transactions have been discussed in further detail in Note 1 –
Organization of Description of Business of the Company’s financial statements included in Part I of this report.
The higher level of revenues was also attributable to a 167% increase in licensing revenue associated with the Company’s
branded products, and a 91% increase in management fees earned from a percentage of revenue generated by the Company’s
cannabis-licensed clients.
Cost
of revenues rose in line with the increase in revenues, from approximately $1.5 million for the three months ended
September 30, 2018 to approximately $6.5 million for the three months ended September 30, 2019. This increase was primarily
due to the cost of hemp seeds incurred by the Company of approximately $5.0 million as part of the Seed Transactions. As
a percentage of revenues, cost of revenues in the current quarter associated with the Seed Transactions was 71%, higher
than the contracted cost ratio of 62.5%, due to the deferral of profits required by the accounting guidance and effected
by an approximate $1.0 million reduction of the recognized revenue, such reduction based on the Company’s
ownership percentage of GenCanna. Apart from the Seed transactions, cost of revenues as a percentage of revenue decreased from
45% in 2018 to 36% in 2019, demonstrating the Company’s continued leveraging of its infrastructure to generate
higher margins in its core business.
As
a result of the foregoing, gross profit expanded from approximately $1.9 million in 2018 to approximately $4.7 million
in 2019, an increase of 151%. Although gross profit as a percentage of revenue declined from 55% to 42%, this was
expected based on the 37.5% contracted margin and the required accounting treatment of the Seed Transactions discussed
above. Looking at the recurring business on a stand-alone basis, gross profit as a percentage of revenues increased from
55% to 64%.
Personnel
expense increased to approximately $1,242,000 for the three months ended September 30, 2019 from approximately $352,000
for the same period a year ago. The increase was primarily the result of the hiring of additional staff to support (i) higher
levels of revenue and (ii) our expansion into a direct owner of cannabis licenses and operator of seed-to-sale operations.
Marketing
and promotion costs increased to approximately $92,000 for the three months ended September 30, 2019 from approximately
$37,000 for the same period a year ago. As a percentage of revenues, however, these costs remained steady at approximately
1% of revenues.
General
and administrative costs increased to approximately to $2.4 million for the three months ended September 30, 2019 from
approximately $2.0 million for the same period a year ago. The year over year increase is primarily due to (i) additional
leasing costs and utilities of a property in Milford, DE which the Company is developing into an additional cultivation and production
facility for its client in that state, and (ii) increases in corporate insurance and professional fees.
As
a result of the above, the Company generated operating income of approximately $973,000 for the three months ended September
30, 2019, compared with an operating loss of approximately $549,000 for the same period in 2018, a positive period-over-period
change of approximately $1,522,000.
Net
non-operating expenses increased to approximately $7.4
million from approximately $2.9 million for the three months ended September 30, 2019 and 2018, respectively.
This increase was primarily due to (i) approximately $3.2 million of non-cash amortization of the beneficial conversion feature
on the $20M Debentures, and of warrants issued together with the issuance of debt (such amortization reflected within Interest
Expense), (ii) the Company’s non-cash equity in the net loss of GenCanna of approximately $2.9 million, and (iii)
approximately $852,000 of interest expense from the issuance of debentures and promissory notes to finance working
capital and the Seed Transactions, offset by a reduction of approximately $2.4 million of losses incurred in the prior period
from the extinguishment of debt. Additionally, the Company recorded a provision for income taxes of approximately $901,000 for
the three months ended September 30, 2019. No provision was recorded in the same period in 2018.
As a result of the foregoing,
the Company incurred net losses of approximately $7.3 million and $3.4 million for the three months ended
September 30, 2019 and 2018, respectively.
Nine
months ended September 30, 2019 compared to nine months ended September 30, 2018
Total
revenues for the nine months ended September 30, 2019 increased to approximately $40.4 million compared with $8.4
million from the same period in 2018, a nearly five-fold increase of approximately $32.0 million. This
considerable growth was principally due to the Seed Transactions discussed in further detail in Note 1 – Organization
of Description of Business of the Company’s financial statements included in Part I of this filing. Revenue generated
from the Seed Transactions commenced in the second quarter of 2019 and approximated $29.0 million through September 30,
2019. The increase in revenues was also attributable to (i) a 106% increase in licensing revenue associated with the Company’s
branded products, (ii) a 105% increase in management fees earned from the Company’s cannabis-licensed clients, and (iii)
an 85% increase in supply procurement revenue, primarily from Kind in Maryland.
Cost
of revenues increased from approximately $3.3 million for the nine months ended September 30, 2018 to approximately $24.5
million for the nine months ended September 30, 2019. This increase was primarily due to the cost of hemp seeds incurred by
the Company of approximately $20.8 million as part of the Seed Transactions. As a percentage of revenues, cost of
revenues associated with the Seed Transactions was 71%, higher than the contracted cost of 62.5%, due to the deferral of
profits required by the accounting guidance and effected via an approximate $4.2 million reduction of the recognized revenue,
such reduction based on the Company’s ownership percentage of GenCanna. Apart from the Seed transactions, cost of revenues
as a percentage of revenue decreased from 40% in 2018 to 33% in 2019, as the Company continued to leverage its infrastructure
to generate higher margins in its recurring business.
As
a result of the foregoing, gross profit increased from approximately
$5.1 million in 2018 to approximately $15.9 million in 2019. Although gross profit as a percentage of revenue declined
from 61% to 39%, this was expected based on the 37.5% contracted margin and the required accounting treatment of
the Seed Transactions discussed above. Looking at the core business on its own, gross profit as a percentage of revenues increased
from 61% to 67%.
Personnel
expense increased to approximately $2.7 million for the nine months ended September 30, 2019 from $822,000 for the
same period a year ago. The increase was primarily the result of the hiring of additional staff to support (i) higher levels of
revenue and (ii) our expansion into direct cannabis and hemp operations.
Marketing
and promotion costs increased from approximately $167,000 for the nine months ended September 30, 2018 to approximately
$287,000 for the nine months ended September 30, 2019. Despite the increase, these costs decreased as a percentage of
revenues from 2% in 2018 to 1% in 2019.
General
and administrative costs increased to approximately $6.8 million for the nine months ended September 30, 2019 from approximately
$4.5 million for the same period a year ago. The year over year increase is primarily due to a (i) higher level
of legal costs and travel expenses in the current period associated with the consolidation of our cannabis-licensee clients, settlement
of the AgriMed matter, Terrace investment, acquisition of MediTaurus, and other merger activity which has yet to close, (ii)
additional leasing costs and utilities of a property in Milford, DE which the Company is developing into an additional cultivation
and production facility for its client in that state, (iii) increases in corporate insurance, and (ii) non-cash increases
in depreciation and amortization.
As
a result of the above, the Company generated operating income of approximately $6.1 million for the nine months ended September
30, 2019, compared with an operating loss of approximately $417,000 for the same period in 2018.
Net
non-operating expenses increased from approximately $5.2
million for the nine months ended September 30, 2018 to approximately $6.7 million for the nine months ended September
30, 2019. This increase was primarily due to (i) approximately $6.5 million of non-cash amortization of the beneficial
conversion feature on the $20M Debentures, and of warrants issued together with the issuance of debt (such amortization reflected
within Interest Expense), (ii) interest expense of approximately $1.5 million primarily from the issuance of
promissory notes to fund the Seed Transactions, and (iii) the Company’s non-cash equity in the loss of GenCanna
of approximately $928,000, offset by (a) a reduction of approximately $4.2 million of losses incurred in the prior period
from the extinguishment of debt, and (b) the net settlement proceeds of $2.9 million from the AgriMed matter. Additionally,
the Company recorded a provision for income taxes of approximately $1.9 million and $12,000 for the nine months ended September
30, 2019 and 2018, respectively.
As
a result of the foregoing, the Company incurred a net loss of approximately $2.5 million during the nine months
ended September 30, 2019 compared with a net loss of approximately $5.6 million during the same period 2018,
a positive period-over-period change in excess of $3.0 million.
Subsequent
Events
On
October 1, 2019, the Illinois Department of Financial & Professional Regulation approved the Company’s acquisition of
the KPGs and Mari-IL. Effective on such date, (i) the purchase price of 1,000,000 shares of the Company’s common stock was
paid to the selling parties, and the KPGs and Mari-IL became wholly-owned subsidiaries of the Company to be consolidated into
the Company’s financial statements.
During
the month of October 2019, the Company issued three-year warrants to purchase 300,000 shares of common stock at an exercise price
of $1.37 per share for services rendered. Also during this month, the Company granted to employees for services (i) 24,074 shares
of common stock, and (ii) five-year options to purchase 500,000 shares of common stock at an exercise price of $0.71 per share.
In October 2019, the Company
closed on the purchase of a 9,000 square foot building in Annapolis, MD. The purchase price of approximately $1.7 million was
paid with the proceeds from a $2.0 million promissory note issued by the Company to an unaffiliated third party and secured by
the property. The note, which matures in January 2020, provides the payee with origination fees aggregating 5% of the principal,
and bears interest at the rate of 2% per month commencing 90 days from the start of the note. The Company intends to develop the
property into a medical marijuana dispensary to be leased to Kind.
Item
3. Quantitative and Qualitative Disclosure About Market Risk
As
a smaller reporting company, we are not required to provide the information required by this Item.
Item
4. Controls and Procedures
Management’s
Evaluation of Our Disclosure Controls and Procedures
Our
management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30,
2019 (the “Evaluation Date”). Based upon that evaluation, the chief executive officer and the chief financial
officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) are recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) are accumulated and
communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure.
During
the quarter ended September 30, 2019 and year to date, we implemented significant measures to remediate previously disclosed ineffectiveness
of our internal control over financial reporting including insufficient degree of segregation of duties amongst our accounting
and financial reporting personnel, and the lack of a formalized and complete set of policy and procedure documentation evidencing
our system of internal controls over financial reporting. This included engagement of accounting consultants as needed to provide
expertise on specific areas of the accounting guidance, the continued hiring of individuals with appropriate experience in internal
controls over financial reporting, and the modification to our accounting processes and enhancement to our financial controls
including the ongoing testing of such controls. Further, during the quarter ended September 30, 2019, we expanded our board of
directors to include a majority of independent disinterested directors and we established an audit, compensation and nominating,
and corporate governance committee of the board of directors. During the quarter, the board of directors also adopted a formal
policy with respect to related party transactions.
Changes
in Internal Control Over Financial Reporting
Other
than as described above, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f)
or 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) that
occurred during the fiscal quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings.
In
July 2019, Thomas Kidrin, the former chief executive officer and a former director of the Company, filed a complaint in the Massachusetts
Superior Court, Suffolk County, captioned Thomas Kidrin v. MariMed Inc., et. al., Civil Action No. 19-2173D. In the complaint,
Mr. Kidrin alleges that the Company failed to pay all wages owed to him and breached his employment agreement, dated August 30,
2012, and requests multiple damages, attorney fees, costs, and interest. The Company has moved to dismiss certain counts
of the complaint and has asserted counterclaims against Mr. Kidrin alleging breach of contract, breach of fiduciary duty, money
had and received, and unjust enrichment. The Company believes that the allegations in the complaint are without merit
and intends to vigorously defend this matter and prosecute its counterclaims.
On
November 13, 2019, Kind Therapeutics USA Inc. (“Kind”) commenced an action in the Circuit Court for Washington County,
MD captioned Kind Therapeutics USA, Inc. vs. MariMed, Inc., MariMed Holdings MD, LLC and MariMed Advisors, Inc. (Case No. C-21-CV-19-000670)
alleging, inter alia, breach of contract, breach of fiduciary duty and unjust enrichment, and seeking a declaratory judgment,
injunctive relief, an accounting and damages in excess of $75,000. On November 15, 2019, the Company filed counterclaims against
Kind and, as plaintiffs, the Company commenced an action against each of Jennifer DiPietro, Susan Zimmerman, Sophia Leonard-Burns
(the Kind sellers) and William Tham, alleging breach of contract with respect to each of the MOU and the management agreement,
unjust enrichment, promissory estoppel/detrimental reliance, and fraud in the inducement, and seeking a declaratory judgement
that the MOU is an enforceable contract, specific performance of such contact, and the establishment of a constructive trust for
the Company’s benefit. Both parties, MariMed (including MariMed Holdings MD, LLC and MariMed Advisors, Inc.) and Kind, brought
motions for a temporary restraining order and a preliminary injunction. By Opinion and Order entered on November 21, 2019, the
Court denied both parties motions for a temporary restraining order. In its opinion, the Court specifically noted that, contrary
to Kind’s allegations, the Management Agreement and Lease “appear to be independent, valid and enforceable contracts.”
Each party’s preliminary injunction motion is currently pending before the Court. The Company believes that its claims for
breach of contract with respect to each of the MOU and the management agreement, unjust enrichment, promissory estoppel/detrimental
reliance, and fraud in the inducement are meritorious and that Kind’s claims against the Company are without merit. The
Company intends to aggressively prosecute and defend the action.
Item
1A. Risk Factors
As
a smaller reporting company, we are not required to provide the information required by this Item. However, limited information
regarding our risk factors appears in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations under the caption Forward-Looking Statements contained in this Quarterly Report on Form 10-Q
and in Item 1A. RISK FACTORS of our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no
material changes from the risk factors previously disclosed in such Annual Report on Form 10-K.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
In
January 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. These funds will be used to fund the Company’s
operations, continue the development of its facilities, and expand its hemp seed wholesale operations and branded licensing business.
In
June 2019, the Company issued an aggregate of 1,000,000 shares of common stock to two owners of Harvest.
During
the nine months ended September 30, 2019, the Company issued
three-year warrants to purchase 1,350,000 shares of common stock at exercise prices ranging from $1.71 to $5.00
per share. Also during this period, the Company granted (i) 108,820 shares of common stock to employees, and (ii)
options to purchase 900,000 shares of common stock to employees and independent directors, at exercise prices
ranging from $0.99 to $1.95 per share, expiring four and five years from grant date.
The
sales of the securities described above were deemed to be exempt from registration under the Securities Act of 1933, as amended
(the “Securities Act”), in reliance upon Sections 4(a)(2) and/or 4(a)(5) of the Securities Act and Regulation D promulgated
thereunder. A legend restricting the sale, transfer, or other disposition of these securities other than in compliance with the
Securities Act was placed on the securities issued in the foregoing transactions.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosure
Not
applicable.
Item
5. Other Information
None.
Item
6. Exhibits
Exhibit
No.
|
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Description
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|
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3.1
|
|
Certificate
of Incorporation of the Registrant. (Incorporated herein by reference to the Company’s Registration Statement
on Form 10-12G (File No. 000-54433) filed on June 9, 2011.)
|
|
|
|
3.1.1
|
|
Amended
Certificate of Incorporation of the Registrant. (Incorporated herein by reference to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2016, filed on April 17, 2017.)
|
|
|
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3.2
|
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Bylaws
– Restated as Amended. (Incorporated herein by reference to the Company’s Registration Statement
on Form 10-12G (File No. 000-54433) filed on June 9, 2011.)
|
|
|
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10.1
|
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Amended
and Restated 2018 Stock Award and Incentive Plan. (Incorporated herein by reference to Appendix A of the Company’s Definitive
Proxy Statement on Schedule 14A, filed on August 26, 2019.)
|
|
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10.2
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Form
of Stock Option Agreement, dated September 27, 2019, with each of David R. Allen, Eva Selhub, M.D. and Edward J. Gildea. (Filed
herewith.)
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31.1
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Rule
13a-14(a)/15d-14(a) Certifications of Chief Executive Officer. (Filed herewith.)
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31.2
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Rule
13a-14(a)/15d-14(a) Certifications of Chief Financial Officer. (Filed herewith.)
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32.1
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Section
1350 Certifications of Chief Executive Officer (Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.)
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32.2
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Section
1350 Certifications of Chief Financial Officer (Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.)
|
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101.INS
XBRL
|
|
Instance
Document (Filed herewith.)
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101.SCH
XBRL
|
|
Taxonomy
Extension Schema (Filed herewith.)
|
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101.CAL
XBRL
|
|
Taxonomy
Extension Calculation Linkbase (Filed herewith.)
|
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101.DEF
XBRL
|
|
Taxonomy
Extension Definition Linkbase (Filed herewith.)
|
|
|
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101.LAB
XBRL
|
|
Taxonomy
Extension Label Linkbase (Filed herewith.)
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101.PRE
XBRL
|
|
Taxonomy
Extension Presentation Linkbase (Filed herewith.)
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereto duly authorized.
Date:
November 27, 2019
MARIMED
INC.
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By:
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/s/
Robert Fireman
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Robert
Fireman
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President
and Chief Executive Officer
(Principal
Executive Officer)
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|
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By:
|
/s/
Jon R. Levine
|
|
|
Jon
R. Levine
|
|
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Chief
Financial Officer
(Principal
Financial Officer)
|
|
INDEX
TO EXHIBITS
Exhibit
No.
|
|
Description
|
|
|
|
3.1
|
|
Certificate
of Incorporation of the Registrant. (Incorporated herein by reference to the Company’s Registration Statement
on Form 10-12G (File No. 000-54433) filed on June 9, 2011.)
|
|
|
|
3.1.1
|
|
Amended
Certificate of Incorporation of the Registrant. (Incorporated herein by reference to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2016, filed on April 17, 2017.)
|
|
|
|
3.2
|
|
Bylaws
– Restated as Amended. (Incorporated by reference herein to the Company’s
Registration Statement on Form 10-12G (File No. 000-54433) filed on June 9, 2011.)
|
|
|
|
10.1
|
|
Amended
and Restated 2018 Stock Award and Incentive Plan. (Incorporated herein by reference to Appendix A of the Company’s Definitive
Proxy Statement on Schedule 14A, filed on August 26, 2019.)
|
|
|
|
10.2
|
|
Form
of Stock Option Agreement, dated September 27, 2019, with each of David R. Allen, Eva Selhub, M.D. and Edward J. Gildea. (Filed
herewith.)
|
|
|
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certifications of Chief Executive Officer. (Filed herewith.)
|
|
|
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certifications of Chief Financial Officer. (Filed herewith.)
|
|
|
|
32.1
|
|
Section
1350 Certifications of Chief Executive Officer (Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.)
|
|
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|
32.2
|
|
Section
1350 Certifications of Chief Financial Officer (Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.)
|
|
|
|
101.INS
XBRL
|
|
Instance
Document (Filed herewith.)
|
|
|
|
101.SCH
XBRL
|
|
Taxonomy
Extension Schema (Filed herewith.)
|
|
|
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101.CAL
XBRL
|
|
Taxonomy
Extension Calculation Linkbase (Filed herewith.)
|
|
|
|
101.DEF
XBRL
|
|
Taxonomy
Extension Definition Linkbase (Filed herewith.)
|
|
|
|
101.LAB
XBRL
|
|
Taxonomy
Extension Label Linkbase (Filed herewith.)
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|
|
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101.PRE
XBRL
|
|
Taxonomy
Extension Presentation Linkbase (Filed herewith.)
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