UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 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
Incorporation
or Organization)
|
|
(I.R.S.
Employer
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:
|
Title
of Each Class |
|
Trading
Symbol(s)
|
|
Name
Of Each Exchange On Which Registered |
|
None |
|
Not
Applicable |
|
Not
Applicable |
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.001 par value
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No
[X]
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
[ ]
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 |
[X]
Accelerated Filer |
| |
|
| [ ]
Non-Accelerated Filer |
[X]
Smaller reporting company |
| |
|
| |
[X]
Emerging growth company |
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 Act.): Yes [ ] No [X]
The
aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the closing price
as of June 28, 2019 of $2.02 per share, the last business day of
the registrant’s most recently completed second fiscal quarter, was
approximately $264.7 million.
At
March 31, 2020, the issuer had outstanding 230,292,407
shares of
Common Stock, par value $.001 per share.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information in response to Part III of this Report are incorporated
herein by reference to the registrant’s Definitive Proxy Statement,
to be filed on or before April 29, 2020, with respect to its 2020
Annual Meeting of Stockholders.
TABLE
OF CONTENTS
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
This
report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements involve risks and
uncertainties and our actual results could differ significantly
from those discussed herein. These include statements about our
expectations, beliefs, intentions or strategies for the future,
which we indicate by words or phrases such as “anticipate,”
“expect,” “estimate,” “could,” “should,” “would,” “project,”
“predict,” “intend,” “plan,” “will,” “believe,” and similar
language, including those set forth in the discussion under
“Description of Business,” “Risk Factors” and “Management’s
Discussion and Analysis or Plan of Operation” as well as those
discussed elsewhere in this Form 10-K. We base our forward-looking
statements on information currently available to us, and we believe
that the assumption and expectations reflected in such
forward-looking statements are reasonable, and we assume no
obligation to update them. Statements contained in this Form 10-K
that are not historical facts are forward-looking statements that
are subject to the “safe harbor” created by the Private Securities
Litigation Reform Act of 1995.
PART I
ITEM 1. BUSINESS.
Overview
MariMed
Inc. (the “Company”) is a leader in the emerging cannabis industry.
The Company is an expert in the development, operation, management
and optimization of facilities for the cultivation, production and
dispensing of medicinal and recreational cannabis and
cannabis-infused products. To date, the Company has developed in
excess of 300,000 square feet of state-of-the-art,
regulatory-compliant facilities in five states – Delaware,
Illinois, Maryland, Massachusetts, and Nevada.
At the
outset of the Company’s entrance into the cannabis industry, the
Company provided advisory services and assistance to its clients in
the procurement of state-issued cannabis licenses, leased its
aforementioned cannabis facilities to these newly-licensed clients,
and provided industry-leading expertise and oversight in all
aspects of their cannabis operations, as well as ongoing
regulatory, accounting, human resources, and administrative
services. During this time, the Company successfully secured, on
behalf of its clients, 13 cannabis licenses across six states – two
in Delaware, three in Illinois, one in Nevada, one in Rhode Island,
three in Maryland, and three in Massachusetts.
Since
entering the cannabis industry, the Company has demonstrated an
excellent track record developing and operating licensed cannabis
facilities, implementing its proprietary operating procedures, and
industry best practices. In 2018, the Company commenced a strategic
plan to transition from an advisory firm that provides cannabis
licensing, operational consulting and real estate services, to a
direct owner of cannabis licenses and operator of seed-to-sale
operations, dedicated to the improvement of health and wellness
through the use of cannabinoids and cannabis products.
The
Company’s strategic plan consists of the acquisition of its
cannabis-licensed clients who currently lease the Company’s
facilities, and the consolidation of these entities under the
MariMed banner. The Company has played a key role in the successes
of these entities, from the securing of their cannabis licenses, to
the development of facilities that are models of excellence, to
providing operational and corporate guidance. Accordingly, the
Company believes it is well suited to own these facilities and
manage the continuing growth of their operations.
A goal in
completing this transition is to present a simpler, more
transparent financial picture to the investor community. Once the
consolidation is complete, the Company’s financial statements will
provide a clearer representation of the revenues, earnings, and
other financial metrics that the Company is generating, rather than
a fee-for-service revenue model that reports only consulting and
management fees, and does not reflect the full breadth of the
Company’s overall business.
To date,
acquisitions of the licensed businesses in Massachusetts and
Illinois have been state-approved and completed, with the remaining
entities located in Maryland, Nevada, and Rhode Island at various
stages of completion and state approvals as further discussed
below. When implemented, all of the Company’s cannabis-licensed
clients will be fully consolidated into the Company, establishing
it as a fully integrated seed-to-sale multistate operator of
licensed cannabis businesses.
Each of
the remaining potential acquisitions is subject to the respective
state’s approval under its laws governing the ownership and
transfer of cannabis licenses. The completion of the entire plan
requires a modification of current cannabis license ownership laws
in in Delaware and Rhode Island, and therefore there is no
assurance that the Company will be successful in fully implementing
its plan. However, the Company continues to develop additional
revenue and business in the states in which it operates and plans
to leverage its success in these markets to expand into other
states where cannabis is and becomes legal.
The
Company has also created its own brands of precision-dosed,
cannabis-infused products designed to treat specific health
conditions, alleviate medical symptoms, or achieve a certain
effect. These products are developed by the Company in cooperation
with state-licensed facilities and operators who meet the Company’s
strict standards, including all natural—not artificial or
synthetic—ingredients. The Company licenses its product
formulations only to knowledgeable manufacturing professionals who
agree to adhere to the Company’s precise scientific formulations
using its trademarked product recipes.
The
Company’s branded products are licensed under brand names including
Kalm Fusion™, Nature’s Heritage™, and Betty’s Eddies™, and are
distributed in the form of dissolvable strips, tablets, powders,
microwaveable popcorn, fruit chews, and with more varieties in
development. The Company also has exclusive sublicensing rights in
certain states to distribute DabTabs™ vaporization tablets infused
with cannabis concentrates, the Binske® line of cannabis
products made from premium artisan ingredients, and the clinically
tested medicinal cannabis strains developed in Israel by Tikun
Olam™. The Company intends to continue licensing and distributing
its brands as well as other top brands in the Company’s current
markets and in partnerships in other state markets across the
country where product sale is legal.
In
anticipation of the growing demand for hemp-derived cannabidiol
(“CBD”), in 2018, the Company invested $30.0 million in GenCanna
Global Inc. (“GenCanna”), a Kentucky-based cultivator, producer,
and distributor of hemp and GMP-quality CBD oils and isolates.
Concurrent with this investment, the Company acquired MediTaurus
LLC (“MediTaurus”), a company operating in the United States and
Europe that has developed proprietary CBD formulations under its
Florance™ brand.
The
transactions with GenCanna and MediTaurus, along with the Company’s
cannabis platform and product experience, enabled the Company to
expand into the emerging global CBD market just as the U.S Farm
Bill was adopted in late 2018 which descheduled industrial hemp and
hemp-derived CBD as controlled substances and classified them as
agricultural commodities. This new law enabled a new emerging
industry of CBD oils, isolates, and infused products within the
United States. In early 2019, the Company established a wholly
owned subsidiary, MariMed Hemp Inc. (“MariMed Hemp”) to market and
distribute hemp-derived CBD products across several vertical
markets.
Over the
Company’s short history operating in the cannabis industry, it has
fostered an excellent reputation for strong management, with
clients that have thrived in their respective markets. The
Company’s goal is to continue this success as it transitions from a
manager and advisor to an owner and operator of cannabis
businesses. The Company’s strengths can be summarized as
follows:
Professional Management
The
Company’s management is one of the most experienced and
long-tenured in the cannabis industry. It hashad considerable
success 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; adhering operations to regulations established
by individual state governments, and writing award-winning
applications for clients applying for licenses in new and
established cannabis-legal states. These skills are important as
the Company expands its footprint into new states on both a direct
ownership and management services basis.
Development of State-of-the-Art Cannabis Facilities and
Operations
The
Company has developed state-of-the-art cannabis cultivation,
production, and dispensary facilities in multiple states utilizing
the Company’s proprietary practices and implementing industry best
practices. Its facilities are examples of operational excellence
under the Company’s proven management policies and
processes.
Cannabis Brand Creation
The
Company has developed unique
brands of precision-dosed cannabis-infused products which are
currently licensed and distributed in cannabis-legal states. The
Company intends to continue expanding both its brand portfolio and
the licensing of its branded products into additional
cannabis-legal states and overseas.
Investment in Hemp Production, Branding, and
Distribution
The
Company has the potential for vast growth in the hemp-derived CBD
market. It was one of the first cannabis companies to expand in the
CBD market with its investment in GenCanna, which will ensure the
Company has access to a safe and reliable source of hemp-derived
CBD to meet the increasing market demand for CBD-infused
products.
GenCanna
planted and harvested in excess of 6,000 acres in 2019, making it
one of the largest hemp producers in the United States. In recent
months GenCanna has found itself in a difficult financial situation
which has had a direct impact on the Company’s financial results as
further described below.
Technological and Scientific Innovation
The
Company is 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. The Company has obtained the highest quality cannabis
strains and genetics. It is at the leading edge of patient
education and physician outreach for cannabis, and it seeks
strategic relationships with companies that are at the forefront of
extraction and distillation.
Education and
Knowledge Sharing
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 the
medical benefits of certain strains and products of cannabis and
hemp. The Company provides educational research and studies on its
brands and products to its growing community of healthcare
professionals and consumers. As cannabis becomes more mainstream,
medical providers will need to be educated on how to prescribe or
make recommendations to their patients, and consumers will need to
learn how to gain the most benefit from certain strains, genetics,
or formulations.
As part of
its education initiative, the Company is assembling a Scientific
Advisory Board (the “SAB”) that includes some of the most
knowledgeable 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.
Cannabis
Consolidation Plan
The
following is a summary of the
progress the Company has made towards its strategic transition from
a management and advisory firm in the cannabis space, to a direct
owner of cannabis licenses and seed-to-sale operations across six
states – DE, IL, NV, MD, MA, and RI.
Massachusetts
In
December 2018, the Massachusetts Cannabis Control Commission (the
“MCCC”) approved the conversion of ARL Healthcare Inc. (“ARL”), the
Company’s cannabis-licensed client, from a non-profit entity to a
for-profit corporation and the transfer of ownership to the
Company. ARL holds cannabis licenses for cultivation, production
and dispensing.
The
Company’s 10,000 square foot
dispensary, developed within its 22,700 square foot property in
Middleboro, received approval from the MCCC to commence operations
in December 2019. The Company’s recently- completed 70,000 square
foot cultivation and production facility, developed within its
138,000 square foot property in New Bedford, received approval from
the MCCC to commence operations in January 2020, with its first
harvest to be completed in the first quarter of 2020,
Illinois
In October
2019, the Illinois Department of Financial & Professional
Regulation (the “IDFPR”) approved the Company’s acquisition 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,
the Company also acquired the selling parties’ interests in Mari
Holdings IL LLC (“Mari-IL”), the Company’s subsidiary which owns
the real estate in which the KPGs’ dispensaries are
located.
Effective
October 1, 2019, 100% of the operations of these entities have been
consolidated into the Company’s financial statements. Additionally,
on January 1, 2020, the IDFPR legalized recreational adult-use
cannabis, allowing the Company to operate both medical and
recreational adult-use programs in the Anna and Harrisburg
dispensaries. Under this new law, the Company has the right to open
two additional dispensaries under the current licenses, which are
in the planning stages.
Maryland
In
December 2018, the Company entered into a memorandum of
understanding (“MOU”) to acquire Kind Therapeutics USA Inc.
(“Kind”), its 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 the Company’s common stock, and other
consideration. The acquisition is subject to approval by the
Maryland Medical Cannabis Commission, which approval is not
expected prior to October 2020.
Also in
December 2018, MariMed Advisors Inc, the Company’s wholly owned
subsidiary, and Kind entered into a management agreement to provide
Kind with 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 Kind’s utilization of the Company’s 180,000 square
foot cultivation and production facility in Hagerstown, MD.
Additionally, in October 2019, the Company purchased a 9,000 square
foot building in Anne Arundel County which it is developing into a
dispensary.
The
current owners of Kind have attempted to renegotiate the terms of
the MOU, even though the MOU contain all the definitive material
terms with respect to the acquisition transaction and confirms the
management and lease agreements. 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. As a result, the consummation of this acquisition will
likely be delayed and may not ultimately be completed. For further
information, see Part II, Item 1. Legal Proceedings in this
report.
Nevada
In August
2019, the Company entered into a purchase agreement to acquire 100%
of the ownership interests of The Harvest Foundation LLC
(“Harvest”), its cannabis-licensed client. Documentation requesting
approval of the transaction has been submitted to the state
cannabis commission, which is pending. Harvest holds both medical
and recreational adult-use cannabis cultivation licenses, and
operates in approximately 10,000 square feet of an industrial
building that the Company leases and has built out into a cannabis
cultivation facility.
Delaware
Delaware’s
current cannabis program is for medical use only, and requires
license holders to be not-for-profit entities. The Company provides
comprehensive management and real estate services to First State
Compassion Center (“FSCC”), its cannabis-licensed client whom the
Company assisted in its being granted Delaware’s first ever
seed-to-sale medical cannabis license and the holder of two of the
four statewide licenses.
FSCC
operates out of the Company’s 47,000 square foot seed-to-sale
facility in Wilmington, and its 4,000 square foot leased retail
location in Lewes. In 2019, the Company signed a lease with an
option to purchase a 100,000 square foot building in Milford, which
it is currently developing into a second cultivation and production
facility for FSCC.
The
state is expected to allow “for-profit” ownership of cannabis
licenses in the near future, at which time the Company will seek to
acquire FSCC and obtain ownership of the licenses and
operations.
Rhode Island
Rhode
Island currently has a medical cannabis program where license
holders must be not-for-profit entities. The Company is in
continuing discussions to acquire, subject to state approval,
ownership interests of the management company that oversees the
operations of the Company’s client, the Thomas C. Slater Compassion
Center (“Slater”). If the transaction is completed, the Company
will generate management fees until the state allows “for-profit”
ownership, at which time the Company will seek to acquire Slater’s
cannabis licenses and operations.
Significant
Transactions in the Current Period
During
2019, the Company, through its MariMed Hemp subsidiary, entered
into several hemp seed sale transactions with GenCanna whereby the
Company acquired large quantities of top-grade feminized hemp seeds
with proven genetics at volume discounts that it sold to GenCanna
at market rates. The seeds met the U.S. government’s definition of
federally legal industrial hemp, which was descheduled as a
controlled substance and classified as an agricultural commodity
upon the signing of the 2018 U.S. Farm Bill.
The
Company purchased $20.75 million of hemp seed inventory which it
sold and delivered to GenCanna for $33.2 million. The Company
provided GenCanna with extended payment terms through December
2019, to coincide with the completion of the seeds’ harvest,
although the payment by GenCanna was not contingent upon the
success of such harvest or its yield. To partially fund the seed
purchases, the Company raised $17.0 million in debt
financings.
By the end
of 2019, GenCanna had not paid the amount it owed the Company for
its seed purchases due to several challenges it faced late in the
year, including a fire at its main processing and lab facility, the
domestic decline of CBD selling prices, and the contraction of the
cannabis capital markets. In February 2020, GenCanna filed for
voluntary reorganization under Chapter 11 with the U.S. Bankruptcy
Court in the Eastern District of Kentucky. The filing is intended
to permit GenCanna to operate its business while working through a
reorganization plan that could include refinancing of its existing
indebtedness, or an alternative restructuring transaction such as a
sale.
As
required by the relevant accounting guidance, the Company initially
recorded the $33.2 million due from GenCanna as a related party
receivable, with approximately $29.0 million recognized as related
party revenue, and approximately $4.2 million classified as
unearned revenue (such amount representing the Company’s 33.5%
ownership portion of the profit on these transactions, which was to
have been recognized as revenue upon payment by GenCanna). As a
result of GenCanna’s Chapter 11 filing, the Company wrote off the
receivable balance of approximately $29.0 million and the unearned
revenue balance of approximately $4.2 million. Additionally, the
Company recorded a charge to net income of approximately $30.2
million, which reduced to zero the carrying value of the Company’s
investment in GenCanna.
GenCanna
recently announced the completion of one the largest recorded hemp
harvests in Kentucky, which exceeded 6,000 acres. The Company’s
management believes that GenCanna’s Chapter 11 filing and ensuing
restructuring will facilitate GenCanna’s ability to refinance its
senior debt and arrange for the orderly payment of amounts due to
its creditors, including the $33.2 million owed to the Company;
however, there are no assurances that it will achieve this outcome
or that the amount owed to the Company will be paid.
In
addition to the foregoing adjustments, the Company recorded bad
debt reserves in 2019 against the receivable and working capital
balances due from (i) Kind of approximately $11.2 million in the
aggregate, in light of the ongoing litigation between the Company
and Kind, and (ii) Harvest of approximately $2.2 million in the
aggregate, due to the anticipated effect on Harvest’s operations
from a weakened local economy due to the coronavirus pandemic.
These charges are further described in the footnotes accompanying
the Company’s audited financial statements included in this
report.
The
Company expects the coronavirus pandemic to likewise have a
negative impact on the operations of certain entities in which the
Company has invested and to whom the Company has extended loans.
For that reason, the Company also wrote off (i) three notes
receivable balances of approximately $1.6 million in the aggregate,
(ii) goodwill of approximately $2.7 million associated with the
Company’s acquisition of MediTaurus, and (iii) the carrying value
of a $500,000 investment. These items are further described in the
footnotes accompanying the Company’s audited financial statements
included in this report.
Corporate
History
The
Company was 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 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.
In
June 2017, the Company
changed its name to MariMed Inc. and its ticker symbol to MRMD. The
Company’s common stock is quoted on the OTCQX
exchange.
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 an entity
that provides a customer relationship management and marketing
platform, branded under the name Sprout, specifically designed for
companies in the cannabis industry. In early 2020, Sprout was being
used by over 150 cannabis dispensaries.
During the
period September 2018 to November 2018, in a series of investments,
the Company purchased an aggregate of $30.0 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 of GenCanna 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. On January 1, 2020, the state legalized adult-use
cannabis, which was added to the Company’s two existing cannabis
licenses, thereby increasing the Company’s operations in the state
to service both medical and recreational cannabis
consumers.
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 2020.
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, which are currently pending.
For further information, see Part II, Item 1. Legal
Proceedings in this report.
In
December 2018, the Company and Kind entered into a management
service agreement to whereby the Company provides Kind with
comprehensive management services, and a 20-year lease with for the
leasing to Kind of the Company’s 180,000 square foot facility in
Hagerstown, Maryland.
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
intended to prevent 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 issued 500,000 shares of its common stock in
exchange for an 8.95% interest in Terrace Inc. (“Terrace”), a
Canadian entity that develops and acquires international cannabis
assets. In November 2019, the common stock of Terrace commenced
public trading on the Toronto Stock Venture Exchange
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 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.
Competition
The
Company’s goal is to become a fully integrated multistate operator
(“MSO”) of seed-to-sale cannabis operations. The Company is
different than some of the other MSO’s in that it has incubated its
client businesses from the bottom up, built its own brands and
branded products, and has retained its core management team from
inception. Other MSO’s have raised significantly more capital,
including on the Canadian Stock Exchange, and acquired assets in
more states than the Company has to date.
Additionally,
while Company has a comprehensive suite of products and services
for the cannabis industry, it faces competition from companies of
varying sizes and geographic reach, who produce and sell similar
products. Some of these companies provide a subset of the Company’s
product and service offerings, while others are able to provide an
equivalent level of the products and services offered by the
Company. The Company’s sales could be reduced significantly if its
competitors develop and market products that are more effective,
more convenient, or are less expensive than its products. Going
forward, as cannabis and hemp products become more mainstream and
have greater acceptance, it is likely that larger and more
established companies, with greater available resources including
name recognition and national distribution networks, will enter the
field. At the same time, the Company believes the emerging cannabis
industry is growing at such a pace that there are more
opportunities available than current cannabis businesses can
support. With abundant opportunities, the Company at times works
with others to insure a positive image in new and emerging states.
Until recently, the black market and illegal cannabis traffickers
that controlled this industry years ago from the shadows are a
lesser competitive threat as such groups are
diminishing.
Intellectual
Property
The
Company has currently filed for trademark protection for its Kalm
Fusion™ and Betty’s Eddies™ branded product lines.
The
Company’s proprietary processing,
and manufacturing techniques and technologies, while not patented
at this time, are kept strictly confidential. The Company enters
into and enforces confidentiality agreements with key employees and
consultants to protect its IP and general know-how.
Employees
As of
December 31, 2019, the Company had a total of 97 employees, of
which 81 were full-time. In addition, the Company utilized a
variety of supporting consultants and oversaw many employees of its
cannabis-licensee clients to implement its policies and
procedures.
Website
Access to Company Reports
The
Company’s annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those
reports are available free of charge on the Company’s website at
www.marimedinc.com as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the
Securities and Exchange Commission.
In
addition, copies of the Company’s annual report will be made
available, free of charge, on written request.
ITEM 1A. RISK FACTORS
The
Company’s business is subject to
numerous risks, including but not limited to those set forth below.
The Company’s operations and performance could also be subject to
risks that do not exist as of the date of this report but emerge
thereafter as well as risks that the Company does not currently
deem material.
Risks
related to the Company’s operations
Our
auditors have expressed doubt as to our ability to continue as a
going concern.
In their
report on our December 31, 2019 financial statements, our auditors
expressed substantial
doubt as to our ability to continue as a going concern. A going
concern qualification could impair our ability to finance our
operations through the sale of debt or equity securities. Our
ability to continue as a going concern will depend, in large part,
on our ability to obtain additional financing and generate positive
cash flow from operations, neither of which is certain. If we are
unable to achieve these goals, our business would be jeopardized
and we may not be able to continue operations.
Additional
Financing Requirements and Access to Capital.
In order
to fund necessary working capital to implement our business
consolidation plan and satisfy current debt obligations, we will
have to obtain debt financing, and/or sell additional equity
securities in future financings. Additional equity financings may
cause further dilution for existing stockholders. Current markets
conditions and the COVID-19 pandemics impact on the global economy
are having a significant adverse impact on both debt and equity
financings. There can be no assurance that any such additional
financing will be available or, if available, that its terms will
be satisfactory to us. In addition, our costs and expenses may
be higher than anticipated, and there can be no assurance that we
will not be required to seek additional financing to meet our
operating cash requirements or other financing and debt service
needs. Failure to obtain additional financing would have
material adverse effect on our results of operation and, could
result in our defaulting under current debt payment
obligations.
Raising
additional funds by issuing convertible debt or equity securities
may cause dilution to our existing stockholders, restrict our
operations or require us to relinquish proprietary
rights.
To the
extent that we raise additional capital by issuing convertible debt
or equity securities, the share ownership of existing stockholders
will be diluted. Further, any future debt financing may
involve covenants that restrict our operations, including
limitations on our ability to incur liens or additional debt, pay
dividends, redeem our stock, make certain investments and engage in
certain merger, consolidation or asset sale transactions, among
other restrictions. In addition, future debt financings may require
us to pledge certain assets as security for such debt.
Marijuana
remains illegal under federal law.
Marijuana
remains illegal under federal law. It is a Schedule I controlled
substance. Even in those jurisdictions in which the use of medical
marijuana has been legalized at the state level, its prescription
is a violation of federal law. The United States Supreme Court has
ruled that it is the federal government that has the right to
regulate and criminalize cannabis, even for medical purposes.
Therefore, federal law criminalizing the use of marijuana trumps
state laws that legalize its use for even medicinal purposes. At
present the states are standing tall against the federal
government, maintaining existing laws and passing new ones in this
area. States continue to exert this freedom notwithstanding
Attorney General Sessions officially leaving prosecution discretion
against state licensed cannabis facilities to local US Attorneys
district by district, which position has yet to be addressed by
Attorney General Barr. This was a change from the Obama
administration which under Attorney General Holder, had a policy
decision to allow states to implement these laws and not prosecute
anyone operating in accordance with applicable state law. The
United States House of Representatives continues to not fund in the
budget any funds for the Department of Justice to prosecute state
compliant licensed cannabis companies. However, we continually face
election cycles, and a new administration or the United States
Congress could introduce a less favorable policy. A change in the
federal attitude towards enforcement could cripple the industry.
However, the medical marijuana industry is our primary target
market, and if this industry was unable to operate, we would lose
the majority of our potential clients, which would have a
significantly negative impact on our business, operations and
financial condition.
Our
continued growth is dependent on additional states legalizing
marijuana.
Continued
development of the marijuana market is dependent upon continued
legislative authorization of marijuana at the state level for
medical and adult recreational use. Any number of factors could
slow or halt the progress. Further, progress, while encouraging, is
not assured and the process normally encounters set-backs before
achieving success. While there may be ample public support for
legislative proposal, key support must be created in the
legislative committee or a bill may never advance to a vote.
Numerous factors impact the legislative process. Any one of these
factors could slow or halt the progress and adoption of marijuana
for medical and/or recreational purposes, which would limit the
market for our products and negatively impact our ability to grow
into other states.
It will
be difficult for you to evaluate us based on our past performance
because we are a relatively new company in a new emerging industry
with a limited operating history.
We
have been actively engaged in the marijuana related business for a
relatively short period of time and, accordingly, have only limited
financial results on which you can evaluate our company and
operations. We are subject to, and must be successful in
addressing, the risks typically encountered by new enterprises and
companies operating in the rapidly evolving cannabis marketplace,
including those risks relating to:
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the
failure to develop brand name recognition and
reputation; |
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the
failure to achieve market acceptance of our services; |
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a
slowdown in general consumer acceptance of legalized marijuana;
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inability to grow and adapt our business to evolving consumer
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The
medical cannabis industry faces strong opposition from traditional
medicines.
It is
believed by many that existing, entrenched, well-funded, businesses
may have a strong economic opposition to the medical marijuana
industry as currently formed. For example, we believe that the
pharmaceutical industry does not want to cede control of any
compound that could become a strong selling drug. Specifically,
medical marijuana will likely adversely impact the existing market
for Marinol, the current “marijuana pill” sold by mainstream
pharmaceutical companies. Further, the medical marijuana industry
could face a material threat from the pharmaceutical industry
should marijuana displace other drugs or simply encroach upon the
pharmaceutical industry’s market share for compounds such as
marijuana and its component parts. The pharmaceutical industry is
well funded with a strong and experienced lobby that eclipses the
funding of the medical marijuana movement. Any inroads the
pharmaceutical industry makes in halting or rolling back the
medical marijuana movement could have a detrimental impact on the
market for our products and thus on our business, operations and
financial condition.
Our
clients may have difficulty accessing the service of banks, which
may make it difficult for them to purchase our products and
services.
As
discussed above, the use of marijuana is illegal under federal law.
Therefore, there are banks that will not accept for deposit funds
from sale of cannabis and may choose not to do business with our
clients. While a member of the United States Congress has stated he
will seek an amendment to banking regulations and laws in order to
allow banks to transact business with state-authorized medical
marijuana businesses, there can be no assurance his legislation
will be successful, that banks will decide to do business with
medical marijuana retailers, or that in the absence of legislation
state and federal banking regulators will not create issues on
banks handling funds generated from an activity that is illegal
under federal law. Notwithstanding, the Company has been able to
secure state-chartered banks that are in compliance with federal
law and provide certain banking services to companies in the
cannabis industry. The inability of potential clients in our target
market to open accounts and otherwise use the service of banks may
make it difficult for them to purchase our products and
services.
We
may not be able to economically comply with any new government
regulation that may be adopted with respect to the cannabis
industry.
New
legislation or regulation, or the application of existing laws and
regulations to the medical and consumer cannabis industries could
add additional costs and risks to doing business. We are subject to
regulations applicable to businesses generally and laws or
regulations directly applicable to communications over the Internet
and access to e-commerce. Although there are currently few laws and
regulations regulating the cannabis products, it is reasonable to
assume that as cannabis use becomes more mainstream that the FDA
and or other federal, state and local governmental agencies will
impose regulations covering the cultivation, purity, privacy,
quality control, security and many other aspects of the industry,
all of which will likely raise the cost of compliance thereby
reducing profits or even making it more difficult to continue
operations, either of which scenarios, if they occur, could have a
negative impact on our business and operations.
Our
limited resources may restrict our ability to manage any growth we
may experience.
Growth
of our business may place a significant strain on our management
systems and resources and may require us to implement new operating
and financial systems, procedures and controls. Our failure to
manage our growth and expansion could adversely affect our
business, results of operations and financial condition. Failure to
implement new systems effectively or within a reasonable period of
time could adversely affect our business, results of operations and
financial condition. The Company is constantly looking to add
additional qualified talent to the management team to support its
growth, but there is no assurance we will be successful in
identifying and/or hiring such people.
The
market may not readily accept our products.
Demand
and market acceptance for our licensed branded new cannabis-infused
products are subject to a high level of uncertainty. The successful
introduction of any new product requires a focused, efficient
strategy to create awareness of and desire for the products. For
example, in order to achieve market acceptance for our marijuana
products we will need to gain market and patient acceptance.
Despite management’s efforts to gather data before introducing new
products as a means to minimize the risk of product non-acceptance,
no assurance can be given that our efforts will be
successful.
Our
marketing strategy may be unsuccessful and is subject to change as
a result of a number of factors, including changes in market
conditions (including the emergence of new market segments which in
our judgment can be readily exploited through the use of our
technology), the nature of possible license and distribution
arrangements and strategic alliances which may become available to
us in the future and general economic, regulatory and competitive
factors. There can be no assurance that our strategy will result in
successful product commercialization or that our efforts will
result in initial or continued market acceptance for our proposed
products.
If
we are unable to protect our intellectual property rights,
competitors may be able to use our technology or trademarks, which
could weaken our competitive position.
We
rely on a combination of copyright, trademark and trade secret laws
and restrictions on disclosure to protect our intellectual property
rights. We also intend to enter into confidentiality or license
agreements with our employees, consultants and customers, and
control access to and distribution of our products, and other
proprietary information. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products.
If
we lose our key employee or fail to hire and retain other talented
employees when necessary, our operations could be
harmed.
The
success of our business is currently dependent, in large part, on
the personal efforts of Messrs. Robert Fireman, Jon R. Levine, and
Timothy Shaw, our chief executive officer, chief financial officer,
and chief operating officer, respectively. The loss of their
services could have a material adverse effect on our business. The
success of our business is currently dependent, in large part, upon
our ability to hire and retain additional qualified management,
marketing, technical, financial, and other personnel if and when
our growth so requires. Competition for qualified personnel is
intense and we may not be able to hire or retain such additional
qualified personnel. Any inability to attract and retain qualified
management and other personnel would have a material adverse effect
on our ability to grow our business and operations.
In
order to sustain and grow our business, we must be able to enhance
our existing products and develop and introduce new products and
services to respond to changing market demand.
The
markets in which we operate are characterized by frequently
changing customer demand and the introduction of new products and
services. In order to be successful, we must be able to enhance our
existing services and products and develop and introduce new
products and services to respond to changing market demand. The
development and enhancement of services and products entails
significant risks, including:
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the
failure to conform our services and products to evolving industry
standards; |
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the
inability to develop, introduce and market enhancements to our
existing services and products or new services and products on a
timely basis; and |
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non-acceptance by the market of such new service and
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We
currently have only limited resources to enhance our technology or
to develop new products.
We
face competition from entities with greater resources than we
have.
There
is potential that the Company will face intense competition from
other companies, some of which can be expected to have longer
operating histories and more financial resources and experience
than the Company. Increased competition by larger and
better-financed competitors could materially and adversely affect
the business, financial condition, results of operations or
prospects of the Company.
Because
of the early stage of the industry in which the Company operates,
the Company expects to face additional competition from new
entrants. To become and remain competitive, the Company will
require research and development, marketing, sales and support. The
Company may not have sufficient resources to maintain research and
development, marketing, sales and support efforts on a competitive
basis which could materially and adversely affect the business,
financial condition, results of operations or prospects of the
Company.
The
introduction of a recreational model for cannabis production and
distribution may impact the medical marijuana market. The impact of
this potential development may be negative for the Company, and
could result in increased levels of competition in its existing
medical market and/or the entry of new competitors in the overall
cannabis market in which the Company operates.
A
change in federal laws regarding the classification of cannabis as
a controlled substance, interstate cannabis commerce, banking for
entities in the cannabis industry, or other related regulations may
have a significant influence on the Company’s business.
Results
of clinical research, if unfavorable, could have a negative impact
on the industries in which we operate and consequently on our
business model.
Research
in Canada, the United States and internationally regarding the
medical benefits, viability, safety, efficacy, dosing and social
acceptance of cannabis or isolated cannabinoids (such as CBD and
THC) remains in early stages. There have been relatively few
clinical trials on the benefits of cannabis or isolated
cannabinoids (such as CBD and THC). Although the Company believes
that the articles, reports and studies support its beliefs
regarding the medical benefits, viability, safety, efficacy, dosing
and social acceptance of cannabis, future research and clinical
trials may prove such statements to be incorrect, or could raise
concerns regarding, and perceptions relating to, cannabis. Future
research studies and clinical trials may reach negative conclusions
regarding the medical benefits, viability, safety, efficacy,
dosing, social acceptance or other facts and perceptions related to
cannabis, which could have a material adverse effect on the demand
for the Company’s products with the potential to lead to a material
adverse effect on the Company’s business, financial condition,
results of operations or prospects.
Anti-money
laundering laws and regulations can limit our ability to access
financing and hamper our growth.
The
Company is subject to a variety of laws and regulations
domestically and in the United States that involve money
laundering, financial recordkeeping and proceeds of crime,
including the U.S. Currency and Foreign Transactions Reporting Act
of 1970 (commonly known as the Bank Secrecy Act), as amended by
Title III of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering)
and Terrorist Financing Act (Canada), the Criminal Code (Canada),
as amended and the rules and regulations thereunder, and any
related or similar rules, regulations or guidelines, issued,
administered or enforced by governmental authorities in the United
States and Canada.
In
February 2014, the Financial Crimes Enforcement Network (“FCEN”) of
the U.S. Department of the Treasury issued a memorandum providing
instructions to banks seeking to provide services to marijuana
related businesses (the “FCEN Memo”). The FCEN Memo states that in
some circumstances, it may not be appropriate to prosecute banks
that provide services to marijuana-related businesses for
violations of federal money laundering laws. It refers to
supplementary guidance that Deputy Attorney General Cole issued to
federal prosecutors relating to the prosecution of money laundering
offenses predicated on Cannabis-related violations of the CSA. It
is unclear at this time whether the current administration will
follow the guidelines of the FCEN Memo. Under U.S. federal law,
banks or other financial institutions that provide a
Cannabis-related business with a checking account, debit or credit
card, small business loan, or any other service could be found
guilty of money laundering, aiding and abetting, or
conspiracy.
We
face the prospect of claims of product liability if anyone is
harmed by our products.
The
Company’s products will be produced for sale directly to end
consumers, and therefore there is an inherent risk of exposure to
product liability claims, regulatory action and litigation if the
products are alleged to have caused loss or injury. In addition,
the production and sale of the Company’s products involves the risk
of injury to end users due to tampering by unauthorized third
parties or product contamination. Previously unknown adverse
reactions resulting from human or animal consumption of the
Company’s products alone or in combination with other medications
or substances could occur. The Company may be subject to various
product liability claims, including, among others, that its
products caused injury or illness, include inadequate instructions
for use or include inadequate warnings concerning possible side
effects or interactions with other substances. While the Company
has product liability insurance coverage in place and works with
third party providers to ensure they do as well, a product
liability claim or regulatory action against the Company could
result in increased costs, could adversely affect the Company’s
reputation, and could have a material adverse effect on its
business and operational results.
We
are subject to compliance with environmental regulations which can
be onerous and costly.
The
Company’s operations are subject to environmental regulation in the
various jurisdictions in which it operates. These regulations
mandate, among other things, the maintenance of air and water
quality standards and land reclamation. They also set forth
limitations on the generation, transportation, storage and disposal
of solid and hazardous waste. Environmental legislation is evolving
in a manner which will require stricter standards and enforcement,
increased fines and penalties for non-compliance, more stringent
environmental assessments of proposed projects and a heightened
degree of responsibility for companies and their officers,
directors and employees. There is no assurance that future changes
in environmental regulation, if any, will not adversely affect the
Company’s operations.
Government
environmental approvals and permits are currently, and may in the
future, be required in connection with the Company’s operations. To
the extent such approvals are required and not obtained, the
Company may be curtailed or prohibited from implementing its
proposed business activities or from proceeding with the
development of its operations as currently proposed.
Failure
to comply with applicable environmental laws, regulations and
permitting requirements may result in enforcement actions
thereunder, including orders issued by regulatory or judicial
authorities causing operations to cease or be curtailed, and may
include corrective measures requiring capital expenditures,
installation of additional equipment, or remedial actions. The
Company may be required to compensate those suffering loss or
damage due to its operations and may have civil or criminal fines
or penalties imposed for violations of applicable laws or
regulations which could have a material adverse effect on its
business and operational results.
We
are subject to potential risks related to, and arising from,
acquiring companies.
The
Company is in the process of acquiring several companies and
intends to acquire other companies in the future. There are risks
inherent in any such acquisition. Specifically, there could be
unknown or undisclosed risks or liabilities of such companies for
which the Company is not sufficiently indemnified. Any such unknown
or undisclosed risks or liabilities could materially and adversely
affect the Company’s financial performance and results of
operations. The Company could encounter additional transaction and
integration related costs or other factors such as the failure to
realize all of the benefits from such acquisitions. All of these
factors could cause dilution to the Company’s earnings per share or
decrease or delay the anticipated accretive effect of the
acquisition and cause a decrease in the market price of the
Company’s securities. The Company may not be able to successfully
integrate and combine the operations, personnel and technology
infrastructure of any such acquired company with its existing
operations. If integration is not managed successfully by the
Company’s management, the Company may experience interruptions in
its business activities, deterioration in its employee and customer
relationships, increased costs of integration and harm to its
reputation, all of which could have a material adverse effect on
the Company’s business, financial condition and results of
operations. The Company may experience difficulties in combining
corporate cultures, maintaining employee morale and retaining key
employees. The integration of any such acquired companies may also
impose substantial demands on the Management. There is no assurance
that these acquisitions will be successfully integrated in a timely
or cost-efficient manner, or at all.
In
the event we are sued for any reason, we would face potential cost
and interference with our business operations.
The
Company is, and may from time to time become, party to litigation
in the ordinary course of business which could adversely affect its
business. Should any litigation in which the Company is, or
becomes, involved be determined against the Company, such a
decision could adversely affect the Company’s ability to continue
operating. Even if the Company is involved in litigation and wins,
litigation can redirect significant Company resources. Litigation
may also create a negative perception of the Company’s
brand.
Risks
related to the Company’s common stock
Possible
issuances of our capital stock would cause dilution to our existing
shareholders.
We
currently have approximately 230.3 million shares of common stock
outstanding and we are authorized to issue up to 500 million
shares. Therefore, we will be able to issue a substantial number of
additional shares without obtaining shareholder approval. In the
event we elect to issue additional shares of common stock in
connection with any financing, acquisition or otherwise, current
shareholders could find their holdings substantially diluted, which
means they will own a smaller percentage of our company. In
addition, we are authorized to issue up to 50 million shares of
preferred stock that our board of directors can issue under any
terms it wants and without any shareholder approval.
The
exercise or conversion of outstanding warrants and options into
common stock will dilute the percentage ownership of our other
shareholders. The sale of such common stock or other common stock
in the open market could adversely affect the market price of our
common stock.
As of
December 31, 2019 and 2018, there were 18,051,357 and 18,916,211,
respectively, of potentially dilutive securities in the form of
outstanding options and warrants. Also as of such dates, there were
(i) $10.0 million and $8.6 million, respectively, of outstanding
convertible debentures payable, and (ii) $350,000 of outstanding
convertible promissory notes in both years, that were potentially
dilutive, whose conversion into common stock is based on a discount
to the market value of common stock on or about the future
conversion date. More convertible
securities will likely be granted in the future to our officers,
directors, employees or consultants and as part of future
financings. The exercise of outstanding stock options and warrants
and conversion of notes and debentures will dilute the percentage
ownership of our other shareholders. Sales, or the expectation of
sales, of a substantial number of shares of our common stock in the
private or public markets could adversely affect the prevailing
market price of our common stock.
Potential
Volatility of Common Share Price
The
market price of the Company’s common stock could be subject to
significant fluctuations. Some of the factors that may cause the
market price of the common stock to fluctuate include:
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the
public’s reaction to the Company’s press releases, announcements
and filings with regulatory authorities and those of its
competitors; |
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fluctuations
in broader stock market prices and volumes; |
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changes
in market valuations of similar companies; |
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investor
perception of the Company, its prospects or the industry in
general; |
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additions
or departures of key personnel; |
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commencement
of or involvement in litigation; |
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changes
in the regulatory landscape applicable to the Company, the dietary
supplement and/or the cannabis and hemp industries; |
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media
reports, publications or public statements relating to, or public
perceptions of, the regulatory landscape applicable to the Company,
the cannabis or the hemp industry, whether correct or
not; |
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announcements
by the Company or its competitors of strategic alliances,
significant contracts, new technologies, acquisitions, commercial
relationships, joint ventures or capital commitments; |
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variations
in the Company’s quarterly results of operations or cash flows or
those of other comparable companies; |
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revenues
and operating results failing to meet the expectations of
securities analysts or investors in a particular
period; |
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changes
in the Company’s pricing policies or the pricing policies of its
competitors; |
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future
issuances and sales of the Company’s common stock; |
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sales
of the Company’s common stock by insiders of the
Company; |
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|
|
|
(o) |
third
party disclosure of significant short positions; |
|
|
|
|
|
|
(p) |
demand
for and trading volume of the Company’s common stock; |
|
|
|
|
|
|
(q) |
changes
in securities analysts’ recommendations and their estimates of the
Company’s financial performance; |
|
|
|
|
|
|
(r) |
short-term
fluctuation in stock price caused by changes in general conditions
in the domestic and worldwide economies or financial markets;
and |
|
|
|
|
|
|
(s) |
the
other risk factors described in this section or other sections of
this 10-K. |
The
realization of any of these risks and other factors beyond the
Company’s control could cause the market price of the common stock
to decline significantly.
In
addition, broad market and industry factors may harm the market
price of the Company’s common stock. Hence, the price of the common
stock could fluctuate based upon factors that have little or
nothing to do with the Company, and these fluctuations could
materially reduce the price of the common stock regardless of the
Company’s operating performance. In the past, following a
significant decline in the market price of a company’s securities,
there have been instances of securities class action litigation
having been instituted against that company. If the Company were
involved in any similar litigation, it could incur substantial
costs, Management’s attention and resources could be diverted and
it could harm the Company’s business, operating results and
financial condition
The
Company has no plans to pay dividends on our common
stock.
We do
not expect to declare or pay dividends on the common stock in the
foreseeable future. In addition, the payment of cash dividends may
be limited or prohibited by the terms of any future loan
agreements.
We
are subject to “penny stock” regulations which may adversely impact
the liquidity and price of our common stock.
Our
common stock is currently deemed a “penny stock.” Penny stocks
generally are equity securities with a price of less than $5.00
(other than securities registered on certain national securities
exchanges). The penny stock rules require a broker-dealer, prior to
a transaction in a penny stock not otherwise exempt from the rules,
to deliver a standardized risk disclosure document that provides
information on penny stocks and the nature and level of risks in
the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the
transaction, and if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer’s
presumed control over the market, and monthly account statements
showing the market value of each penny stock held in the customer’s
account. In addition, broker-dealers who sell such securities to
persons other than established customers and accredited investors
(generally, those persons with assets in excess of $1,000,000
(excluding the value of their primary residence) or annual income
exceeding $200,000 or $300,000 together with their spouse), the
broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive
the purchaser’s written agreement to the transaction.
These
requirements could reduce the level of trading activity, if any, in
the secondary market for our common stock. As a result of the
foregoing, our shareholders may find it more difficult to sell
their shares.
ITEM 1B. UNRESOLVED STAFF
COMMENTS.
None.
ITEM 2. PROPERTIES.
The
Company currently owns and leases the following properties
throughout the United States.
Wilmington, Delaware
The
Company owns a 45,070 square foot facility on 2.25 acres within a
fenced-in business park which it purchased in September 2016 and
developed into a cannabis cultivation, processing, and dispensary
facility. The property is secured under a mortgage with the Bank of
New England that matures in 2031. The facility is leased to a
cannabis licensee company occupying 100% of the space under a
20-year triple net lease expiring in 2035.
Lewes, Delaware
The
Company leases 4,000 square feet of retail space in a newly-built
multi-use building. This five-year lease with a five-year option to
extend the term commenced in October 2016. We built out the space
into a cannabis dispensary which is sub-leased to the same licensed
cannabis company occupying the Wilmington facility, under a
five-year triple net lease with a five-year option to
extend.
Milford, Delaware
In March
2019, the Company entered into a lease of a 100,000 square foot
warehouse that it intends to build into a cultivation and
processing facility. The lease term is 10 years, with an option to
extend the term for three additional five-year periods.
Construction of the first 60,000 square feet of this facility has
commenced and is estimated to be completed by late 2020.
Anna, Illinois
The
Company owns a 3,400 free-standing retail building that is secured
under a mortgage with DuQuoin State Bank maturing in 2020, provided
it is not annually renewed by the bank, which the bank has done
every year of this mortgage (the “DSQ Mortgage”). The property is
leased to the Company’s state licensed cannabis dispensary under a
20-year triple net lease expiring in 2036.
Harrisburg, Illinois
The
Company owns a 3,400 free-standing retail building, also secured
under the DSQ Mortgage. The property is leased to the Company’s
state licensed cannabis dispensary under a 20-year triple net lease
expiring in 2036.
Hagerstown, Maryland
The
Company owns a 180,000 square foot manufacturing facility that it
has developed into cannabis cultivation and production facility.
The property secures a $3 million promissory note to an accredited
investor which matures in 2020. This facility is leased to the
company’s cannabis licensed client under a 20 year triple net lease
expiring in 2038.
Annapolis,
Maryland
In October
2019, the Company purchased a free-standing 10,000 square foot
industrial building which it is developing into a medical marijuana
dispensary.
Clark, Nevada
The
Company is leasing approximately 10,000 square feet of an
industrial building that we built out into a cannabis cultivation
facility. This facility is subleased to the Company’s licensed
cannabis client under a sub-lease which is coterminous with the
Company’s lease for 10 years expiring in 2024.
New Bedford, Massachusetts
The
Company owns 138,000 square foot industrial property located on
21.95 acres within the New Bedford Industrial Park. The property
secures a mortgage with the Bank of New England that matures in
2027. Approximately half of the available square footage is leased
to a non-cannabis manufacturing company under a five-year lease.
The Company developed the other half of the building into a
cannabis cultivation and processing facility which was approved for
operations in January 2020.
Middleborough, Massachusetts
In
July 2017, the Company purchased a 22,700 square foot retail and
warehouse building located on the main street of this municipality.
The property secures a $2.0 million promissory note issued to an
accredited investor that matures in December 2021. The Company has
constructed a 10,000 square foot retail dispensary which will be
leased to the same cannabis licensee that leases the Company’s New
Bedford facility under a 20-year lease that started in
mid-2019.
Norwood Massachusetts
The
Company’s corporate offices are located in Norwood, Massachusetts.
This 10,000 square foot space is under a 10-year lease expiring in
2028 with a related party which contain a 5-year extension
option.
ITEM 3. 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., et al. (Case No.
C-21-CV-19-000670) alleging, inter alia, breach of contract, breach
of fiduciary duty, 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 a third-party complaint against the Members of
Kind (Jennifer DiPietro, Susan Zimmerman, and Sophia Leonard-Burns)
and William Tham, alleging breach of contract with respect to each
of the Memorandum of Understanding (“MOU”) and the Management
Agreement (“MSA”), 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
MSA 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 MOU, the MSA, as well as its
claims for unjust enrichment, promissory estoppel/detrimental
reliance, and fraud in the inducement are meritorious. Further, the
Company believes that Kind’s claims against the Company are without
merit. The Company intends to aggressively prosecute and defend the
action.
ITEM 4. MINE SAFETY
DISCLOSURES
Not
Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
The
Company’s common stock currently trades on the OTCQX market under
the MRMD ticker symbol. Any over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual
transactions.
Stockholders
As of
March 31, 2020, the Company had 728 stockholders of record and
230,292,407 outstanding shares of common stock.
Dividends
The
Company has never declared or paid a
dividend on its common stock, and it does not anticipate paying
cash or other dividends in the foreseeable future.
Recent
Sales of Unregistered Securities
In October
2019, the Company issued 1,000,000 shares of common stock
representing the purchase price of the acquisition of the KPG’s and
the minority interests of Mari-IL
In
November 2019, the Company sold 215,000 shares of common stock at a
price of $0.70 per share, resulting in total proceeds of $150,000.
Also during this month, the Company issued 172,663 shares of common
stock to settle an outstanding obligation that approximated
$121,000.
During the
period October 2019 to November 2019, the Company issued three-year
and four-year warrants to purchase 510,000 shares of common stock
at exercise prices ranging from $0.75 to $1.37 per
share.
In
December 2019, the holder of Company-issued debentures converted
$1,100,000 of principal and approximately $17,000 of accrued
interest into subscriptions on 3,004,131 shares of common stock at
a conversion price of $0.37 per share. Such common shares were
issued in January 2020.
In
December 2019, the Company issued 2,435,116 shares of common stock
to retire a promissory note with a principal balance of $950,000
and accrued interest of $97,100.
In
December 2019, the Company’s CEO and an independent board member
exercised stock options to purchase 200,000 and 132,499 shares of
common stock, respectively, at weighted average exercise prices of
$0.11 and $0.08 and $0.14 per share, respectively.
In
December 2019, the Company granted 32,726 shares of common stock to
employees at an aggregate value of approximately $29,000. These
granted shares were issued in January 2020.
During the
period October 2019 to December 2019, the Company granted options
to purchase 1,665,000 shares of common stock at exercise prices of
$0.42 to $1.00 per share. Also during this period, options to
purchase 856,251 shares of common stock were forfeited.
The
securities described above were issued to accredited investors in
private transactions not involving a public offering or the payment
of commissions and 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.
Company
Equity Compensation Plans
The
following table sets forth information as of December 31, 2019 with
respect to compensation plans (including individual compensation
arrangements) under which equity securities of the Company are
authorized for issuance.
|
Plan
Category |
|
Number
of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights |
|
|
Weighted-average
exercise price of
outstanding
options, warrants
and rights |
|
|
Number
of
securities
remaining available
for future
issuance under equity compensation plans |
|
|
Equity
compensation plans approved by
stockholders(1) |
|
|
6,271,250 |
|
|
$ |
1.51 |
|
|
|
38,535,000 |
|
|
Equity
compensation plans not approved by stockholders |
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
Total |
|
|
6,271,250 |
|
|
|
|
|
|
|
38,535,000 |
|
|
(1) |
Consist
of options exercisable for (i) 250,000 shares granted under the
Company’s the 2011 Stock Option and Restricted Stock Award Plan;
and (ii) 6,021,250 shares granted under the Incentive Plan
(hereinafter defined) of which 4,556,250 shares continue to be
subject to the terms of the Company’s 2018 Stock Award and
Incentive Plan. |
In August
2019, the Company’s board of directors approved the Amended and
Restated 2018 Stock Award and Incentive Plan (the “Incentive
Plan”), based on the board’s belief that awards authorized under
the Incentive Plan provide incentives for the achievement of
important performance objectives and promote the long-term success
of the Company. In September 2019, the Incentive Plan was approved
by the stockholders at the Company’s annual stock-holders
meeting.
The
Incentive Plan is an omnibus plan, authorizing a variety of equity
award types as well as cash and long-term incentive awards. 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.
ITEM 6. SELECTED FINANCIAL
DATA
The
Company is a “smaller reporting company” as defined by Regulations
S-K and as such, is not required to provide the information
contained in this item pursuant to Regulation S-K.
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Forward
Looking Statements
When
used in this form 10-K and in future filings by the Company with
the Commission, words or phrases such as “anticipate,” “believe,”
“could,” “would,” “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 and products 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
regulations that pertain to our operations; changes in technology
that render our technology relatively inferior, obsolete or more
expensive compared to others; changes in the business prospects of
our business partners and customers; increased competition,
including from our business partners; and enforcement of federal
cannabis related laws.
The
following discussion should be read in conjunction with the
financial statements and related notes which are included in this
report under Item 8.
We do
not undertake to update our forward-looking statements or risk
factors to reflect future events or circumstances.
Overview
MariMed
Inc. (the “Company”) is a leader in the emerging cannabis industry.
The Company is an expert in the development, operation, management
and optimization of facilities for the cultivation, production and
dispensing of medicinal and recreational cannabis and cannabis
infused products. To date, the Company has developed in excess of
300,000 square feet of state-of-the-art, regulatory-compliant
facilities in five states – Delaware, Illinois, Maryland,
Massachusetts, and Nevada.
At
the outset of the Company’s entrance into the cannabis industry,
the Company provided advisory services and assistance to its
clients in the procurement of state-issued cannabis licenses,
leased its aforementioned cannabis facilities to these
newly-licensed clients, and provided industry-leading expertise and
oversight in all aspects of their cannabis operations, as well as
ongoing regulatory, accounting, human resources, and administrative
services. During this time, the Company successfully secured, on
behalf of its clients, 13 cannabis licenses across six states – two
in Delaware, three in Illinois, one in Nevada, one in Rhode Island,
three in Maryland, and three in Massachusetts.
Since
entering the cannabis industry, the Company has demonstrated an
excellent track record developing and operating licensed cannabis
facilities, implementing its proprietary operating procedures, and
industry best practices. In 2018, the Company commenced a strategic
plan to transition from an advisory firm that provides cannabis
licensing, operational consulting and real estate services, to a
direct owner of cannabis licenses and operator of seed-to-sale
operations, dedicated to the improvement of health and wellness
through the use of cannabinoids and cannabis products.
The
Company’s strategic plan consists of the acquisition of its
cannabis-licensed clients who currently lease the Company’s
facilities, and the consolidation of these entities under the
MariMed banner. The Company has played a key role in the successes
of these entities, from the securing of their cannabis licenses, to
the development of facilities that are models of excellence, to
providing operational and corporate guidance. Accordingly, the
Company believes it is well suited to own these facilities and
manage the continuing growth of their operations.
A
goal in completing this transition is to present a simpler, more
transparent financial picture to the investor community. Once the
consolidation is complete, the Company’s financial statements will
provide a clearer representation of the revenues, earnings, and
other financial metrics that the Company is generating, rather than
a fee-for-service revenue model that reports only consulting and
management fees, and does not reflect the full breadth of the
Company’s overall business.
To
date, acquisitions of the licensed businesses in Massachusetts and
Illinois have been state-approved and completed, with the remaining
entities located in Maryland, Nevada, and Rhode Island at various
stages of completion and state approvals as further discussed
below. When implemented, all of the Company’s cannabis-licensed
clients will be fully consolidated into the Company, establishing
it as a fully integrated seed-to-sale multistate operator of
licensed cannabis businesses.
Each
of the remaining potential acquisitions is subject to the
respective state’s approval under its laws governing the ownership
and transfer of cannabis licenses. The completion of the entire
plan requires a modification of current cannabis license ownership
laws in in Delaware and Rhode Island, and therefore there is no
assurance that the Company will be successful in fully implementing
its plan. However, the Company continues to develop additional
revenue and business in the states in which it operates and plans
to leverage its success in these markets to expand into other
states where cannabis is and becomes legal.
The
Company has also created its own brands of precision-dosed,
cannabis-infused products designed to treat specific health
conditions, alleviate medical symptoms, or achieve a certain
effect. These products are developed by the Company in cooperation
with state-licensed facilities and operators who meet the Company’s
strict standards, including all natural—not artificial or
synthetic—ingredients. The Company licenses its product
formulations only to knowledgeable manufacturing professionals who
agree to adhere to the Company’s precise scientific formulations
using its trademarked product recipes.
The
Company’s branded products are licensed under brand names including
Kalm Fusion™, Nature’s Heritage™, and Betty’s Eddies™, and are
distributed in the form of dissolvable strips, tablets, powders,
microwaveable popcorn, fruit chews, and with more varieties in
development. The Company also has exclusive sublicensing rights in
certain states to distribute DabTabs™ vaporization tablets infused
with cannabis concentrates, the Binske® line of cannabis products
made from premium artisan ingredients, and the clinically tested
medicinal cannabis strains developed in Israel by Tikun Olam™. The
Company intends to continue licensing and distributing its brands
as well as other top brands in the Company’s current markets and in
partnerships in other states markets across the country where
product sale is legal.
In
anticipation of the growing demand for hemp-derived cannabidiol
(“CBD”), in 2018, the Company invested $30.0 million in GenCanna
Global Inc. (“GenCanna”), a Kentucky-based cultivator, producer,
and distributor of hemp and GMP-quality CBD oils and isolates.
Concurrent with this investment, the Company acquired MediTaurus
LLC (“MediTaurus”), a company operating in the United States and
Europe that has developed proprietary CBD formulations under its
Florance™ brand.
The
transactions with GenCanna and MediTaurus, along with the Company’s
cannabis platform and product experience, enabled the Company to
expand into the emerging global CBD market just as the U.S Farm
Bill was adopted in late 2018 which descheduled industrial hemp and
hemp-derived CBD as controlled substances and classified them as
agricultural commodities. This new law enabled a new emerging
industry of CBD oils, isolates, and infused products within the
United States. In early 2019, the Company established a wholly
owned subsidiary, MariMed Hemp Inc. (“MariMed Hemp”) to market and
distribute hemp-derived CBD products across several vertical
markets.
Over
the Company’s short history operating in the cannabis industry, it
has fostered an excellent reputation for strong management, with
clients that have thrived in their respective markets. The
Company’s goal is to continue this success as it transitions from a
manager and advisor to an owner and operator of cannabis
businesses.
Significant
Transactions in the Current Period
During
2019, the Company, through its MariMed Hemp subsidiary, entered
into several hemp seed sale transactions with GenCanna whereby the
Company acquired large quantities of top-grade feminized hemp seeds
with proven genetics at volume discounts that it sold to GenCanna
at market rates. The seeds met the U.S. government’s definition of
federally legal industrial hemp, which was descheduled as a
controlled substance and classified as an agricultural commodity
upon the signing of the 2018 U.S. Farm Bill.
The
Company purchased $20.75 million of hemp seed inventory which it
sold and delivered to GenCanna for $33.2 million. The Company
provided GenCanna with extended payment terms through December
2019, to coincide with the completion of the seeds’ harvest,
although the payment by GenCanna was not contingent upon the
success of such harvest or its yield. To partially fund the seed
purchases, the Company raised $17.0 million in debt
financings.
By the end
of 2019, GenCanna had not paid the amount it owed the Company for
its seed purchases due to several challenges it faced late in the
year, including a fire at its main processing and lab facility, the
domestic decline of CBD selling prices, and the contraction of the
cannabis capital markets. In February 2020, GenCanna filed for
voluntary reorganization under Chapter 11 with the U.S. Bankruptcy
Court in the Eastern District of Kentucky. The filing is intended
to permit GenCanna to operate its business while working through a
reorganization plan that could include refinancing of its existing
indebtedness, or an alternative restructuring transaction such as a
sale.
As
required by the relevant accounting guidance, the Company initially
recorded the $33.2 million due from GenCanna as a related party
receivable, with approximately $29.0 million recognized as related
party revenue, and approximately $4.2 million classified as
unearned revenue (such amount representing the Company’s 33.5%
ownership portion of the profit on these transactions, which was to
have been recognized as revenue upon payment by GenCanna). As a
result of GenCanna’s Chapter 11 filing, the Company wrote off the
unearned revenue balance of approximately $4.2 million and
receivable balance of approximately $29.0 million. Additionally,
the Company recorded a charge to net income of approximately $30.2
million, which reduced to zero the carrying value of the Company’s
investment in GenCanna.
GenCanna
recently announced the completion of the largest recorded hemp
harvest in Kentucky, which exceeded 6,000 acres. The Company’s
management believes that GenCanna’s Chapter 11 filing and ensuing
restructuring will facilitate GenCanna’s ability to refinance its
senior debt and arrange for the orderly payment of amounts due to
its creditors, including the $33.2 million owed to the Company;
however, there are no assurances that it will achieve this outcome
or that the amount owed to the Company will be paid.
In
addition to the foregoing adjustments, the Company recorded bad
debt reserves in 2019 against receivable and working capital
balances due from (i) Kind of approximately $11.2 million in the
aggregate, in light of the ongoing litigation between the Company
and Kind, and (ii) Harvest of approximately $2.2 million in the
aggregate, due to the anticipated effect on Harvest’s operations
from a weakened local economy due to the coronavirus pandemic.
These charges are further described in the footnotes accompanying
the Company’s audited financial statements included in this
report.
The
Company expects the coronavirus pandemic to likewise have a
negative impact on the operations of certain entities in which the
Company has invested and to whom the Company has extended loans.
For that reason, the Company wrote off (i) three notes receivable
balances of approximately $1.6 million in the aggregate, (ii)
goodwill of approximately $2.7 million associated with the
Company’s acquisition of MediTaurus, and (iii) the carrying value
of a $500,000 investment. These items are further described in the
footnotes accompanying the Company’s audited financial statements
included in this report.
Revenues
The
Company’s revenues are currently
comprised of the following primary categories:
Real
Estate – The Company’s state-of-the-art, regulatory-compliant
cannabis facilities are leased to its cannabis-licensed clients
over 20-year lease terms. The Company generates rental income from
occupancy, tenant improvements, equipment rentals, and additional
rental income based on the success of the cannabis
licensees.
Management
–The Company receives fees for providing comprehensive oversight of
its clients’ entire cannabis cultivation, production, and
dispensary operations. Along with this oversight, the Company
provides human resources, regulatory, accounting, sales, marketing,
and reporting services.
Licensing
– The Company derives licensing revenue from the sale of its
branded precision-dosed cannabis-infused products, such as Kalm
Fusion™ and Betty’s Eddies™, to regulated dispensaries throughout
the country.
Consulting
– The Company assists third parties in securing cannabis licenses,
and provides advisory services in the areas of facility design and
development, and cultivation and dispensing best
practices.
Supply
Procurement – The Company maintains large volume discounts with top
national vendors of cultivation and production supplies and
equipment, which the Company acquires and resells at competitive
prices to its cannabis-licensed clients or third
parties.
Product
Sales – The Company’s direct sales of cannabis, hemp, and products
derived from these plants are classified under this revenue
category. In 2019, the Company commenced the direct sale of
acquired hemp seed inventory. As the Company continues to explore
opportunities to continue such sales, significant product sales are
expected to be generated from (i) the distribution of the Company’s
acquired and developing hemp-derived CBD product lines, (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
The
Company classifies its expenses into three
broad categories:
|
|
● |
cost of
revenues, which includes the direct costs associated with the
generation of the Company’s revenues;
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● |
operating
expenses, which include the sub-categories of personnel, marketing
and promotion, general and administrative, bad debts, and goodwill
write-downs; and
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● |
non-operating income
and expenses, which include the sub-categories of interest expense,
interest income, losses on debt settlements, losses on equity
investments, changes in the fair value of non-consolidated
investments, and other one-time gains or losses.
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Liquidity
and Capital Resources
As of
December 31, 2019, the Company reported cash and cash equivalents
of approximately $739,000 and negative working capital of
approximately $29.3 million, compared to cash and cash equivalents
of approximately $4.1 million and working capital of approximately
$5.8 million as of December 31, 2018. The decline in working
capital from year-to-year was primarily the result of (i) the
issuance of $17.0 million of promissory notes to fund the purchase
of large quantities of top-grade hemp seeds at volume discounts
which then were sold to GenCanna, a related party, at market rates
(the “Seed Transactions”), (ii) the write off of the receivable
balance due from GenCanna of approximately $29.0 million following
GenCanna’s Chapter 11 filing, (iii) the recording in 2019 of a bad
debt reserve against the receivable and working capital balances
due from Kind of approximately $11.2 million in the aggregate in
light of the current litigation between the Company and Kind, and
(iv) the recording in 2019 of a bad debt reserve against the
receivable and working capital balances due from Harvest of
approximately $2.2 million in the aggregate due to the anticipated
effect on Harvest’s operations from a weakened local economy due to
the coronavirus pandemic. Please refer to the footnote disclosures
accompanying the Company’s audited consolidated financial
statements for the years ended December 31, 2019 and 2018, included
in Part I of this report, for further discussion of the Seed
Transactions and the receivable reserves.
While the
bankruptcy of GenCanna, previously discussed in Part I of this
report, has had a significant impact on the Company’s short-term
capital resources, the Company successfully completed several
financing transactions subsequent to December 31, 2019 to generate
liquidity and working capital. As further disclosed in Note 21 –
Subsequent Events of the Company’s audited financial
statements, the Company raised approximately $4.4 million as part
of an exchange agreement with two institutional stockholders, and
$935,000 from the issuance of convertible debentures. Additionally,
the Company has extended the maturity dates of approximately $19.4
million of promissory notes, and is in the process of finalizing
the documentation to extend another $3.0 million of promissory
notes.
Moreover,
as of the filing date of this report, the Company has obtained a
commitment from an accredited investor for a $12.0 million loan,
secured by the Company’s real estate, at a rate of 10% per annum
with a one-year term, and an option to extend for an additional
year. This transactions is expected to close upon the lender’s
completion of its due diligence, which is in its final stages,
although there is no assurance that it will close in the
foreseeable future or at all. Also as of the filing date of this
report, the Company is in discussions with financial institutions
to consider generating liquidity from the Company’s unencumbered
real property through mortgage-backed financings, the refinancing
of certain outstanding mortgage loans, the sales-leaseback of
certain properties, and/or a combination thereof. Based on
preliminary discussions, such financings could potentially generate
upwards of $17.0 million from such transactions, however the
Company has not signed any commitments it has received to date and
there are no assurances that it will.
In
addition to the aforementioned financing transactions that have
been consummated and that are in progress, the operations of the
Company’s recently acquired entities in Illinois and Massachusetts
are expected to generate considerable liquidity and working capital
for the Company. Since their acquisition, the KPGs in Illinois have
generated approximately $1.0 million of pretax income for the
Company, which has exceeded forecasts. The cultivation and
production facility acquired in Massachusetts will soon complete
its first harvest and commence full scale selling operations in
this robust market.
In
connection with the preparation of its financial statements for the
year ended December 31, 2019, the Company’s management evaluated
the Company’s ability to continue as a going concern in accordance
with the ASU 2014-15, Presentation of Financial Statements–Going
Concern (Subtopic 205-40), which requires an assessment of
relevant conditions or events, considered in the aggregate, that
are known or reasonably knowable by management on the issuance
dates of the financial statements which indicated the probable
likelihood that the Company will be unable to meet its obligations
as they become due within one year after the issuance date of the
financial statements.
As part of
its evaluation, management assessed known events, trends,
commitments, and uncertainties, which at the time included the
status of its consolidation plan, the GenCanna bankruptcy, the
amount of capital raised by the Company during the past two
calendar years, the recent level of cannabis industry investment
activity, the stock price movement of public cannabis companies,
the actions and/or results of certain bellwether cannabis
companies, the measure of cannabis investor confidence, and the
changes to state laws with respect to adult-use recreational and
medical cannabis use.
The
Company believes that it will close incremental debt financings in
the foreseeable future, and it projects that its operating profit
will organically support its day-to-day operations by the latter
part of 2020. However, since there are no assurances that another
financing transaction will be consummated, or that the Company will
meet or exceed its projections in light of the unknown current
state of the global economy, there are similarly no assurances that
the Company will be able to meet all of its obligations as they
become due within one year after the issuance date of the financial
statements.
Operating Activities
For the
year ended December 31, 2019, net cash used in operating activities
approximated $24.1 million, compared to approximately $2.9 million
for the same period in 2018. The rise of cash used in operations
was primarily due to (i) the purchases of hemp seed inventory of
approximately $20.75 million as part of the Seed Transactions, from
which the Company generated zero income as the related amounts due
from GenCanna were entirely written off, and (ii) cash outflows of
approximately $2.0 million for the payment of interest on
promissory notes and the purchase of inventory for the Company’s
two locations in the state of Massachusetts that commenced
operations in late 2019 and early 2020.
Investing Activities
Net
cash used in investing activities for the year ended December 31,
2019 was approximately $12.5 million, compared to approximately
$40.1 million for the same period in 2018. The decrease was
principally caused by the Company’s $30.0 million investment in
GenCanna in 2018, offset by increases to loans to third-parties
from $550,000 in 2018 to $2.43 million in 2019.
Financing Activities
Net
cash used in financing activities for the year ended December 31,
2019 was approximately $33.3 million, compared to approximately
$45.8 million for the same period in 2018. In 2019, the Company
raised approximately $19. 8 million from the issuance of promissory
notes, $9.6 million from the issuance of convertible debentures,
and $2.75 million from the sale of common stock.
In 2018,
the Company raised approximately $31.8 million from the sale of
common stock, $10.0 million from the issuance of convertible
debentures, and approximately $3.2 million from the issuance of a
promissory note. In addition, capital of $2.0 million was extended
to the Company for building improvements on its New Bedford, MA
property by the mortgagee.
These
funds were used to execute on the Company’s strategy to become a
fully integrated multistate operator of seed-to-sale cannabis
operations, to continue the development of its regulated
facilities, to grow its hemp operations, to expand its branded
licensing business, and for working capital purposes.
Results
of Operations
Year ended December 31, 2019 compared to year ended December 31,
2018
Total
revenues for the year ended December 31, 2019 increased to
approximately $45.6 million from approximately $11.9 million for
the same period in 2018. The year-over-year increase of
approximately $33.8 million was primarily due to the Seed
Transactions of approximately $29.0 million, the receipt of which
has been written off as explained above. Excluding the Seed
Transaction, revenues for the year ended December 31, 2019
increased to approximately $16.6 million, a 40.0% increase from
approximately $11.9 million for the same period in 2018.This
significant increase was primarily due to (i) cannabis sales of the
KPGs in Illinois acquired by the Company in October 2019, (ii)
management and additional rental fees from the Company’s
cannabis-licensed clients in Delaware and Maryland, such fees
earned based on a percentage of the increasing revenue generated by
these clients, and (iii) new distribution channels secured for the
Company’s Betty’s Eddies™ and Kalm Fusion™ branded product
lines.
Cost of
revenues increased to approximately $26.9 million for the year
ended December 31, 2019 from to approximately $4.0 million for the
year ended December 31, 2018. The year-over-year increase of
approximately $22.9 million was also due to the Seed Transactions,
which comprised $20.75 million of the increase. Excluding the Seed
Transactions, cost of revenues for the year ended December 31, 2019
increased to approximately $6.2 million from approximately $4.0
million for the same period in 2018. As a percentage of revenue,
these costs increased from 37.1% in 2019 to 34.1% in 2018 due to
the fact that the Company’s cultivation and production facility in
Massachusetts was in the midst of its first harvest and was ramping
up its manufacturing operations at year end in order for full scale
selling operations to start in 2020.
As a
result of the foregoing, gross profit increased to approximately
$18.7 million for the year ended December 31, 2019 from
approximately $7.8 million for the same period a year ago, an
increase of 139.4%. Excluding the Seed Transactions, gross profit
increased to approximately $10.4 million for the year ended
December 31, 2019 from approximately $7.8 million for the same
period a year ago, an increase of 33.4%.
Personnel
expenses increased to approximately $3.8 million for the year ended
December 31, 2019 from approximately $1.4 million for the same
period a year ago. . The increase was primarily due to the hiring
of additional staff to support (i) higher levels of revenue and
(ii) the Company’s expansion into a direct owner and operator and
operator of seed-to-sale cannabis and hemp operations.
Marketing
and promotion costs increased to approximately $370,000 for the
year ended December 31, 2019 from approximately $292,000 for the
same period a year ago. As a percentage of revenues excluding the
Seed Transactions, however, these costs fell slightly to 2.2% from
2.5% of revenues.
General
and administrative costs decreased to approximately $8.9 million
for the year ended December 31, 2019 from approximately $10.1
million for the same period a year ago. This decrease is primarily
due to an approximate $3.9 million reduction of amortization
expense on stock option and stand-alone warrant issuances based on
fewer issuances and a lower Company stock price in 2019 compared to
2018, offset by increases in (i) rent and utilities in of a
property lease in Milford, DE that commenced in 2019 and which the
Company is developing into an additional cultivation and production
facility for its client in that state, and (ii) professional
fees.
Bad debts
increased to approximately $44.5 million for the year ended
December 31, 2019 from $150,000 for the same period a year ago as a
result of the aforementioned write-off of the GenCanna receivable
($29.0 million) following GenCanna’s Chapter 11 filing, and
reserves recorded against balances due from Kind ($11.2 million)
given the current litigation between the Company and Kind, and
Harvest ($2.2 million) due to the anticipated effect on Harvest’s
operations from a weakened local economy due to the coronavirus
pandemic.
Goodwill
write-downs, were approximately $2.7 million for the year ended
December 31, 2019 and approximately $1.3 million for the same
period a year ago. The 2019 expense was due to the write off of
intangible assets associated with the Company’s acquisition of
MediTaurus. The 2018 expense related to the excess consideration
paid for the acquisitions of ARL and iRollie. Please refer to Note
3 – Acquisitions of the Company’s audited financial
statements where these acquisitions are described in further
detail.
As a
result of the above, the Company incurred an operating loss of
approximately $41.6 million for the year ended December 31, 2019,
compared to approximately $5.4 million for the same period in 2018.
Excluding the aforementioned one-time receivable and goodwill
write-downs and reserves, operating income increased to
approximately $7.5 million for the year ended December 31, 2019
from approximately $1.9 million for the same period a year
ago.
Net
non-operating expenses increased to approximately $40.3 million for
the year ended December 31, 2019 from approximately $8.0 million
for the same period a year ago. The increase is primarily due to
(i) the approximate $30.2 million write-down of the Company’s
investment in and previously realized equity in earnings of
GenCanna, an equity method investment, (ii) an approximate $5.0
million increase in discounts and beneficial conversion features on
Company-issued debt (recorded under Interest Expense on the
statement of operations), and (iii) an increase in interest expense
paid and accrued of approximately $3.3 million due to higher levels
of debt carried in 2019, offset by (a) an approximate $4.1 million
decrease in the loss associated with the settlement of debt, and
(b) the net settlement proceeds received in 2019 of $2.9 million
from the AgriMed matter.
As a
result of the foregoing, the Company incurred a net loss of
approximately $81.9 million in 2019 and approximately $13.3 million
in 2018.
2020
Plans
In 2020,
the Company intends (subject to state and regulatory approvals) to
complete the consolidation of its cannabis- licensed clients as
previously discussed in the section Consolidation Plans
within ITEM 1. BUSINESS above. When completed, the Company
will operate as a fully integrated seed-to-sale multistate cannabis
operator.
In
addition to completing the consolidation, the Company’s 2020 focus
will be on the following key areas:
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1) |
Grow the
operations of the Company’s recently opened dispensary in
Middleboro, MA and cultivation and production facility in New
Bedford, MA, and develop two additional dispensaries in this
state.
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2) |
Introduce
the Company’s Nature Heritage™ branded flower and popular
infused-product brands such as Betty’s Eddies™ and Kalm Fusion™
into the robust Massachusetts medical and adult-use
marketplace. |
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2) |
Expand the
profitability of the dispensaries in Anna and Harrisburg in
Illinois—which legalized recreational adult-use of cannabis at the
start of 2020, in addition to its continuing medical use cannabis
program—and develop two additional dispensaries in this
state
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3) |
Strengthen
operations in Maryland and Delaware by adding over 100,000 square
feet of new cannabis cultivation and processing
facilities. |
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4) |
Drive
licensing fees through the sale of branded products at the
Company’s owned and managed facilities and with strategic partners
into additional markets.
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5) |
Continue
to build brands and distribution of CBD-infused products through
the Company’s MariMed Hemp subsidiary, and continue to work to
reorganize and reset the Company’s efforts with GenCanna to
create value.
|
No
assurances can be given that any of these plans will come to
fruition or that if implemented will necessarily yield positive
results.
The
following transactions have occurred in early 2020:
GenCanna
Bankruptcy Filing
In
February 2020, GenCanna filed for voluntary reorganization under
Chapter 11 of the Bankruptcy Code with the U.S. Bankruptcy Court in
the Eastern District of Kentucky. The filing is intended to permit
GenCanna to operate its business while working through a
reorganization plan that could include refinancing of its existing
indebtedness, or an alternative restructuring transaction such as a
sale.
Consequently, as of
December 31, 2019, the Company wrote off the outstanding receivable
balance from GenCanna of approximately $29.0 million and the
related balance of unearned revenue of approximately $4.2 million
as previously discussed in Item 1. Business.
Additionally, the
Company recorded a charge to net income of approximately $30.2
million, classified under Loss on Equity Investments on the
statement of operations for the year ended December 31, 2019, which
reduced to zero the carrying value of the Company’s previous
investment in GenCanna as previously discussed in Item 1.
Business.
GenCanna
recently announced the completion of the largest recorded hemp
harvest in Kentucky, which exceeded 6,000 acres. The Company’s
management believes that GenCanna’s Chapter 11 filing and ensuing
restructuring will facilitate GenCanna’s ability to refinance its
senior debt and arrange for the orderly payment of amounts due to
its creditors, including the $33.2 million owed to the Company;
however, there are no assurances that it will achieve this
outcome.
Exchange
Agreement
In
February 2020, the Company entered into an exchange agreement with
two institutional stockholders (the “TIS”) whereby the TIS loaned
the Company an aggregate of $4,417,500. In return for the loans,
and the Company (i) issued promissory notes to the TIS for the
aggregate amount, bearing interest at 16.5% per annum and maturing
in August 2021, with a right to extend the maturity date through
February 2022 upon payment of an extension fee. and (ii) exchanged
4,903,333 shares of the Company’s common stock previously acquired
by the TIS, for an equal number of shares of newly designated
Series B convertible preferred stock.
In
connection with the exchange agreement, the Company filed (i) a
certificate of designation to designate the rights and preferences
of the Series B convertible preferred stock, and (ii) a certificate
of elimination to return all shares of the Series A convertible
preferred stock, of which no shares were issued or outstanding at
the time of filing, to the status of authorized and unissued shares
of undesignated preferred stock.
Issuance of Additional Debenture
In
February 2020, the Company sold to the holder of the $20,000,000
convertible debentures previously issued by the Company (the “$20M
Debentures”) an additional convertible debenture in the principal
amount of $1,000,000 bearing interest at a rate of 6.5% per annum
that matures one year from issuance, with a 6.5% issuance discount,
resulting in net proceeds to the Company of $935,000 (the “$1M
Debenture”).
The
terms of the $1M Debenture are substantially consistent with the
terms of the $20M Debentures. The SPA, registration rights
agreement, and addendum to the SPA were all amended and restated to
incorporate the $1M Debenture. As part of issuance of the $1M
Debenture, the Company issued three-year warrants to the Holder to
purchase 180,000 shares of common stock at an exercise prices of
$0.75 per share.
Promissory Note Extensions
In
February 2020, the Company and MariMed Hemp issued an $11.5 million
promissory note (the $11.5M Note”) which amended and restated their
previously issued $10.0 million secured promissory note to an
unaffiliated party. The $11.5M Note bears interest at a rate of 15%
per annum and matures on June 15, 2020, with monthly interest
payments and minimum amortization payments of $3.0 million in the
aggregate due on or before April 30, 2020, of which the Company has
already paid $2.3 million. The $11.5M Note is secured by a first
priority security interest in the assets of certain of the
Company’s subsidiaries and brands, and a pledge of the Company’s
ownership interest in certain of its subsidiaries. The $11.5M Note
imposes certain covenants on the borrowers effective on the date of
the amendment agreement.
The
Company also extended the maturity dates of another $9.4 million of
promissory notes, and is in the process of finalizing the
documentation to extend an additional $3.0 million of promissory
notes.
Loan Commitment
In
February, the Company received a commitment from an accredited
investor for a $12.0 million loan, secured by the Company’s real
estate, at a rate of 10% per annum with a one-year term, and an
option to extend for an additional year. The loan contains an
origination fee of four points and a prepayment penalty of two
months interest. This transactions is expected to close upon the
lender’s completion of its due diligence, which is in its final
stages, although there is no assurance that it will close in the
foreseeable future or at all.
Conversion of Debentures Payable
In
January 2020, the holder of the $20M Debentures converted
$1,000,000 of principal and approximately $205,000 of accrued
interest into 3,555,859 shares of common stock at a conversion
price of $0.34 per share.
Promissory Note Paydown
In
February, the Company paid cash to retire a promissory note in the
principal amount of $100,000 which matured during that
month.
Equity Transactions
In
the first quarter of 2020, the Company issued 3,236,857 shares of
common stock associated with the subscriptions on common stock
outstanding at December 31, 2019 and previously disclosed in Note
13 – Equity. These subscriptions were comprised of (i)
32,726 shares in connection with common stock granted in 2019; (ii)
3,004,131 shares with respect to the December 2019 conversion of a
portion of the $20M Debentures, and (iii) 200,000 shares associated
with exercise of stock options by the Company’s CEO.
Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet
arrangements that have or are reasonably likely to have a current
or future effect on its financial condition, changes in financial
condition, revenues, or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to
investors.
Inflation
In
the opinion of management, inflation has not had a material effect
on the Company’s financial condition or results of its
operations.
Seasonality
In
the opinion of management, the Company’s financial condition and
results of its operations are not materially impacted by seasonal
sales.
Recent
Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, Intangibles -
Goodwill and Other (Topic 350) which simplifies goodwill
impairment testing by requiring that such periodic testing be
performed by comparing the fair value of a reporting unit with its
carrying amount and recognizing an impairment charge for the amount
by which the carrying amount exceeds the reporting unit’s fair
value. The Company is currently evaluating the impact of Topic 350
on its consolidated financial statements and related disclosures,
which is effective for fiscal years, including interim periods,
beginning after December 15, 2019.
In
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The
Company is a “smaller reporting company” as defined by Regulation
S-K and, as such, is not required to provide the information
contained in this item pursuant to Regulation S-K.
ITEM 8. FINANCIAL
STATEMENTS.
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the
Board of Directors and
Stockholders of MariMed, Inc.
Opinion
on the Financial Statements
We have
audited the accompanying consolidated balance sheets of MariMed,
Inc. (the Company) as of December 31, 2019 and 2018, and the
related consolidated statements of operations, stockholders’
equity, and cash flows for each of the years in the two-year period
ended December 31, 2019, and the related notes (collectively
referred to as the financial statements). In our opinion, the
financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2019 and 2018,
and the results of its operations and its cash flows for each of
the years in the two-year period ended December 31, 2019, in
conformity with accounting principles generally accepted in the
United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits
included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered recurring
net losses from operations and has a net capital deficiency, which
raises substantial doubt about its ability to continue as a going
concern. Management’s plans regarding those matters are discussed
in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
M&K
CPAS, PLLC.
We have
served as the Company’s auditor since 2018.
Houston,
TX
March 31,
2020
MariMed Inc.
Consolidated
Balance Sheets
|
|
|
December
31, |
|
| |
|
2019 |
|
|
2018 |
|
| Assets |
|
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents |
|
$ |
738,688 |
|
|
$ |
4,104,315 |
|
|
Accounts
receivable, net |
|
|
1,669,139 |
|
|
|
5,376,966 |
|
|
Deferred
rents receivable |
|
|
1,796,825 |
|
|
|
2,096,384 |
|
|
Due from
third parties, net |
|
|
- |
|
|
|
3,860,377 |
|
|
Note
receivable, current portion |
|
|
311,149 |
|
|
|
51,462 |
|
|
Inventory |
|
|
1,219,429 |
|
|
|
90,460 |
|
|
Investments |
|
|
1,449,144 |
|
|
|
- |
|
|
Other
current assets |
|
|
192,368 |
|
|
|
128,552 |
|
|
Total
current assets |
|
|
7,376,742 |
|
|
|
15,708,516 |
|
| |
|
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
|
42,792,369 |
|
|
|
34,099,864 |
|
|
Intangibles |
|
|
2,364,042 |
|
|
|
185,000 |
|
|
Investments |
|
|
1,324,661 |
|
|
|
1,672,163 |
|
|
Note
receivable, less current portion |
|
|
1,639,496 |
|
|
|
1,092,376 |
|
|
Debentures
receivable |
|
|
- |
|
|
|
30,000,000 |
|
|
Right-of-use assets
under operating leases |
|
|
5,787,423 |
|
|
|
- |
|
|
Right-of-use assets
under finance leases |
|
|
111,103 |
|
|
|
- |
|
|
Due from
related parties |
|
|
- |
|
|
|
119,781 |
|
|
Other
assets |
|
|
175,905 |
|
|
|
82,924 |
|
|
Total
assets |
|
$ |
61,571,741 |
|
|
$ |
82,960,624 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities and
stockholders’ equity |
|
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
4,719,069 |
|
|
$ |
3,915,430 |
|
|
Accrued
expenses |
|
|
5,395,996 |
|
|
|
1,588,368 |
|
|
Deferred
rents payable |
|
|
- |
|
|
|
105,901 |
|
|
Notes
payable |
|
|
23,112,742 |
|
|
|
3,877,701 |
|
|
Mortgages
payable, current portion |
|
|
223,888 |
|
|
|
188,231 |
|
|
Operating
lease liabilities, current portion |
|
|
917,444 |
|
|
|
- |
|
|
Finance
lease liabilities, current portion |
|
|
38,412 |
|
|
|
- |
|
|
Due to
related parties |
|
|
1,454,713 |
|
|
|
276,311 |
|
|
Other
current liabilities |
|
|
858,176 |
|
|
|
- |
|
|
Total
current liabilities |
|
|
36,720,440 |
|
|
|
9,951,942 |
|
| |
|
|
|
|
|
|
|
|
|
Mortgages
payable, less current portion |
|
|
7,112,842 |
|
|
|
7,348,581 |
|
|
Debentures
payable |
|
|
5,835,212 |
|
|
|
3,557,440 |
|
|
Operating
lease liabilities, less current portion |
|
|
5,399,414 |
|
|
|
- |
|
|
Finance
lease liabilities, less current portion |
|
|
75,413 |
|
|
|
- |
|
|
Other
liabilities |
|
|
100,200 |
|
|
|
338,200 |
|
|
Total
liabilities |
|
|
55,243,521 |
|
|
|
21,196,163 |
|
| |
|
|
|
|
|
|
|
|
|
Stockholders’
equity: |
|
|
|
|
|
|
|
|
|
Series A
convertible preferred stock, $0.001 par value; 50,000,000 shares
authorized at December 31, 2019 and 2018; no shares issued or
outstanding at December 31, 2019 and 2018 |
|
|
- |
|
|
|
- |
|
|
Common
stock, $0.001 par value; 500,000,000 shares authorized at December
31, 2019 and 2018; 228,408,024 and 211,013,043 shares issued and
outstanding at December 31, 2019 and 2018, respectively |
|
|
228,408 |
|
|
|
211,013 |
|
|
Common
stock subscribed but not issued; 3,236,857 and 97,136 shares at
December 31, 2019 and 2018, respectively |
|
|
1,168,074 |
|
|
|
169,123 |
|
|
Additional
paid-in capital |
|
|
112,245,730 |
|
|
|
87,180,165 |
|
|
Accumulated
deficit |
|
|
(106,760,527 |
) |
|
|
(25,575,808 |
) |
|
Noncontrolling
interests |
|
|
(553,465 |
) |
|
|
(220,032 |
) |
|
Total
stockholders’ equity |
|
|
6,328,220 |
|
|
|
61,764,461 |
|
|
Total
liabilities and stockholders’ equity |
|
$ |
61,571,741 |
|
|
$ |
82,960,624 |
|
See
accompanying notes to consolidated financial
statements.
MariMed Inc.
Consolidated
Statements of Operations
|
|
|
Year Ended
December 31, |
|
|
|
|
2019 |
|
|
2018 |
|
| |
|
|
|
|
|
|
|
Revenues |
|
$ |
16,575,395 |
|
|
$ |
11,851,915 |
|
|
Revenues
from related party |
|
|
29,029,249 |
|
|
|
- |
|
|
Total
revenues |
|
|
45,604,644 |
|
|
|
11,851,915 |
|
| |
|
|
|
|
|
|
|
|
|
Cost of
revenues |
|
|
26,902,916 |
|
|
|
4,041,122 |
|
| |
|
|
|
|
|
|
|
|
|
Gross
profit |
|
|
18,701,728 |
|
|
|
7,810,793 |
|
| |
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
Personnel |
|
|
3,841,725 |
|
|
|
1,339,832 |
|
|
Marketing
and promotion |
|
|
369,577 |
|
|
|
292,477 |
|
|
General
and administrative |
|
|
8,886,086 |
|
|
|
10,052,731 |
|
|
Bad
debts |
|
|
44,539,820 |
|
|
|
150,000 |
|
|
Goodwill
write-downs |
|
|
2,662,669 |
|
|
|
1,331,785 |
|
|
Total
operating expenses |
|
|
60,299,877 |
|
|
|
13,166,825 |
|
| |
|
|
|
|
|
|
|
|
|
Operating
income |
|
|
(41,598,149 |
) |
|
|
(5,356,032 |
) |
| |
|
|
|
|
|
|
|
|
|
Non-operating income
(expenses): |
|
|
|
|
|
|
|
|
|
Interest
expense |
|
|
(12,718,952 |
) |
|
|
(4,366,295 |
) |
|
Interest
income |
|
|
467,798 |
|
|
|
593,214 |
|
|
Loss on
debt settlements, net |
|
|
(5,180 |
) |
|
|
(4,133,481 |
) |
|
Loss on
equity investments |
|
|
(30,334,503 |
) |
|
|
(43,221 |
) |
|
Change in
fair value of investments |
|
|
(640,856 |
) |
|
|
- |
|
|
Other |
|
|
2,948,917 |
|
|
|
2,858 |
) |
|
Total
non-operating expenses, net |
|
|
(40,282,776 |
) |
|
|
(7,952,641 |
) |
| |
|
|
|
|
|
|
|
|
|
Net income
(loss) |
|
$ |
(81,880,925 |
) |
|
|
(13,308,673 |
) |
| |
|
|
|
|
|
|
|
|
|
Net income
(loss) attributable to noncontrolling interests |
|
$ |
(696,206 |
) |
|
|
295,395 |
|
|
Net income
(loss) attributable to MariMed Inc. |
|
$ |
(81,184,719 |
) |
|
$ |
(13,604,068 |
) |
| |
|
|
|
|
|
|
|
|
|
Net income
(loss) per share |
|
$ |
(0.39 |
) |
|
$ |
(0.07 |
) |
|
Weighted
average common shares outstanding |
|
|
208,720,496 |
|
|
|
192,376,020 |
|
See
accompanying notes to consolidated financial
statements.
MariMed Inc.
Consolidated
Statements of Stockholders’ Equity
| |
|
Series
A Convertible Preferred Stock Subscribed But Not Issued |
|
|
Common
Stock |
|
|
Common
Stock Subscribed
But
Not Issued
|
|
|
Additional |
|
|
Accumulated |
|
|
Non-Controlling |
|
|
Total
Stockholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Par
Value |
|
|
Shares |
|
|
Amount |
|
|
Paid-In
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 |
|
| Conversion
of Series A preferred stock |
|
|
(500,000 |
) |
|
|
(500 |
) |
|
|
970,988 |
|
|
|
971 |
|
|
|
|
|
|
|
|
|
|
|
33,573 |
|
|
|
|
|
|
|
|
|
|
|
34,044 |
|
| Sales
of common stock |
|
|
|
|
|
|
|
|
|
|
19,188,980 |
|
|
|
19,189 |
|
|
|
|
|
|
|
|
|
|
|
31,801,812 |
|
|
|
|
|
|
|
|
|
|
|
31,821,001 |
|
| Common
stock issued for acquisitions |
|
|
|
|
|
|
|
|
|
|
642,575 |
|
|
|
643 |
|
|
|
|
|
|
|
|
|
|
|
1,194,917 |
|
|
|
|
|
|
|
|
|
|
|
1,195,560 |
|
| Common
stock issued to settle obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000 |
|
|
|
74,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,160 |
|
| Equity
issued for services |
|
|
|
|
|
|
|
|
|
|
3,420,526 |
|
|
|
3,421 |
|
|
|
|
|
|
|
|
|
|
|
3,671,697 |
|
|
|
|
|
|
|
|
|
|
|
3,675,118 |
|
| Issuance
of subscribed common shares |
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
|
|
1,000 |
|
|
|
(1,000,000 |
) |
|
|
(370,000 |
) |
|
|
369,000 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
| Equity
conversion |
|
|
|
|
|
|
|
|
|
|
222,222 |
|
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
(222 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
| Amortization
of stock option grants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,945,398 |
|
|
|
|
|
|
|
|
|
|
|
3,945,398 |
|
| Amortization
of stand-alone warrant issuances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,815,219 |
|
|
|
|
|
|
|
|
|
|
|
1,815,219 |
|
| Exercise
of stock options |
|
|
|
|
|
|
|
|
|
|
654,602 |
|
|
|
655 |
|
|
|
|
|
|
|
|
|
|
|
38,345 |
|
|
|
|
|
|
|
|
|
|
|
39,000 |
|
| Exercise
of warrants |
|
|
|
|
|
|
|
|
|
|
2,142,710 |
|
|
|
2,143 |
|
|
|
- |
|
|
|
- |
|
|
|
383,252 |
|
|
|
|
|
|
|
|
|
|
|
385,395 |
|
| Discount
on debentures payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,057,833 |
|
|
|
|
|
|
|
|
|
|
|
1,057,833 |
|
| Discount
on promissory notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,709,595 |
|
|
|
|
|
|
|
|
|
|
|
1,709,595 |
|
| Beneficial
conversion feature on debentures payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,569,908 |
|
|
|
|
|
|
|
|
|
|
|
5,569,908 |
|
| Conversions
of debentures payable |
|
|
|
|
|
|
|
|
|
|
524,360 |
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
1,434,982 |
|
|
|
|
|
|
|
|
|
|
|
1,435,506 |
|
| Conversions
of promissory notes |
|
|
|
|
|
|
|
|
|
|
1,568,375 |
|
|
|
1,568 |
|
|
|
|
|
|
|
|
|
|
|
1,902,748 |
|
|
|
|
|
|
|
|
|
|
|
1,904,316 |
|
| Settlement
of promissory notes |
|
|
|
|
|
|
|
|
|
|
3,827,374 |
|
|
|
3,827 |
|
|
|
79,136 |
|
|
|
94,963 |
|
|
|
9,996,048 |
|
|
|
|
|
|
|
|
|
|
|
10,094,838 |
|
| Distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(690,917 |
) |
|
|
(690,917 |
) |
| Net
income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,604,068 |
) |
|
|
295,395 |
|
|
|
(13,308,673 |
) |
| 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 |
|
|
|
|
|
|
|
|
|
|
1,014,995 |
|
|
|
1,015 |
|
|
|
|
|
|
|
|
|
|
|
2,748,985 |
|
|
|
|
|
|
|
|
|
|
|
2,750,000 |
|
| Common
stock issued for acquisitions |
|
|
|
|
|
|
|
|
|
|
2,520,000 |
|
|
|
2,520 |
|
|
|
|
|
|
|
|
|
|
|
2,468,317 |
|
|
|
|
|
|
|
837,002 |
|
|
|
3,307,839 |
|
| Common
stock issued for investments |
|
|
|
|
|
|
|
|
|
|
500,000 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
1,589,500 |
|
|
|
|
|
|
|
|
|
|
|
1,590,000 |
|
| Common
stock issued to settle obligations |
|
|
|
|
|
|
|
|
|
|
172,663 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
125,871 |
|
|
|
|
|
|
|
|
|
|
|
126,044 |
|
| Issuance
of subscribed shares |
|
|
|
|
|
|
|
|
|
|
97,136 |
|
|
|
97 |
|
|
|
(97,136 |
) |
|
|
(169,123 |
) |
|
|
169,026 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
| Stock
grants |
|
|
|
|
|
|
|
|
|
|
108,820 |
|
|
|
109 |
|
|
|
32,726 |
|
|
|
29,438 |
|
|
|
193,601 |
|
|
|
|
|
|
|
|
|
|
|
223,148 |
|
| Amortization
of stock option grants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,457,684
|
|
|
|
|
|
|
|
|
|
|
|
1,457,684
|
|
| Amortization
of stand-alone warrant issuances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
391,932 |
|
|
|
|
|
|
|
|
|
|
|
391,932 |
|
| Exercise
of stock options |
|
|
|
|
|
|
|
|
|
|
3,061,808 |
|
|
|
3,062 |
|
|
|
200,000 |
|
|
|
22,000 |
|
|
|
422,438 |
|
|
|
|
|
|
|
|
|
|
|
447,500 |
|
| Exercise
of warrants |
|
|
|
|
|
|
|
|
|
|
686,104 |
|
|
|
686 |
|
|
|
|
|
|
|
|
|
|
|
611,755 |
|
|
|
|
|
|
|
|
|
|
|
612,441 |
|
| Discount
on debentures payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148,056 |
|
|
|
|
|
|
|
|
|
|
|
1,148,056 |
|
| Discount
on promissory notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
605,780 |
|
|
|
|
|
|
|
|
|
|
|
605,780 |
|
| Beneficial
conversion feature on debentures payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,235,469 |
|
|
|
|
|
|
|
|
|
|
|
4,235,469 |
|
| Conversion
of debentures payable |
|
|
|
|
|
|
|
|
|
|
6,798,339 |
|
|
|
6,798 |
|
|
|
3,004,131 |
|
|
|
1,116,636 |
|
|
|
7,852,486 |
|
|
|
|
|
|
|
|
|
|
|
8,975,920 |
|
| Settlement
of promissory notes |
|
|
|
|
|
|
|
|
|
|
2,435,116 |
|
|
|
2,435 |
|
|
|
|
|
|
|
|
|
|
|
1,044,665 |
|
|
|
|
|
|
|
|
|
|
|
1,047,100 |
|
| Distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(474,229 |
) |
|
|
(474,229 |
) |
| Net
income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,184,719 |
) |
|
|
(696,206 |
) |
|
|
(81,880,925 |
) |
| Balances
at December 31, 2019 |
|
|
- |
|
|
$ |
- |
|
|
|
228,408,024 |
|
|
$ |
228,408 |
|
|
|
3,236,857 |
|
|
$ |
1,168,074 |
|
|
$ |
112,245,730 |
|
|
$ |
(106,760,527 |
) |
|
$ |
(553,465 |
) |
|
$ |
6,328,220 |
|
The
above statements do not show a column for Series A convertible
stock as the balances are zero and there is no
activity in the
periods presented. See accompanying notes to consolidated financial
statements.
MariMed Inc.
Consolidated
Statements of Cash Flows
| |
|
Year
Ended December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| Cash
flows from operating activities: |
|
|
|
|
|
|
| Net
income (loss) attributable to MariMed Inc. |
|
$ |
(81,184,719 |
) |
|
$ |
(13,604,068 |
) |
| Net
income (loss) attributable to noncontrolling interests |
|
|
(696,206 |
) |
|
|
295,395 |
|
| Adjustments
to reconcile net income (loss) to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
| Depreciation |
|
|
999,106 |
|
|
|
657,854 |
|
| Amortization
of intangibles |
|
|
197,500 |
|
|
|
|
|
| Amortization
of stock grants |
|
|
223,148 |
|
|
|
- |
|
| Amortization
of option grants |
|
|
1,457,684 |
|
|
|
3,945,398 |
|
| Amortization
of stand-alone warrant issuances |
|
|
391,932 |
|
|
|
1,815,219 |
|
| Amortization
of warrants attached to debt |
|
|
2,455,964 |
|
|
|
1,171,330 |
|
| Amortization
of beneficial conversion feature |
|
|
5,242,483 |
|
|
|
1,522,107 |
|
| Amortization
of original issue discount |
|
|
183,867 |
|
|
|
- |
|
| Goodwill
write-downs |
|
|
2,662,669 |
|
|
|
1,331,785 |
|
| Bad
debts |
|
|
44,539,820 |
|
|
|
150,000 |
|
| Loss
on sale of fixed assets |
|
|
- |
|
|
|
(2,858 |
) |
| Equity
issued to settle obligations |
|
|
5,180 |
|
|
|
1,024,117 |
|
| Loss
on preferred stock conversions |
|
|
- |
|
|
|
34,044 |
|
| Loss
on debt settlements |
|
|
- |
|
|
|
3,334,366 |
|
| Loss
on equity investments |
|
|
30,334,503 |
|
|
|
43,221 |
|
| Change
in fair value of investments |
|
|
640,856 |
|
|
|
- |
|
| Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| Accounts
receivable |
|
|
(37,701,009 |
) |
|
|
(4,073,482 |
) |
| Deferred
rents receivable |
|
|
299,559 |
|
|
|
(1,485,595 |
) |
| Due
from third parties |
|
|
1,355,746 |
|
|
|
(3,387,906 |
) |
| Inventory |
|
|
(495,394 |
) |
|
|
- |
|
| Other
current assets |
|
|
(63,815 |
) |
|
|
156,547 |
|
| Other
assets |
|
|
(92,981 |
) |
|
|
163,462 |
|
| Accounts
payable |
|
|
632,471 |
|
|
|
3,614,087 |
|
| Accrued
expenses |
|
|
3,436,024 |
|
|
|
183,032 |
|
| Deferred
rents payable |
|
|
(105,901 |
) |
|
|
105,901 |
|
| Operating
lease payments |
|
|
529,434 |
|
|
|
- |
|
| Finance
lease interest payments |
|
|
(6,414 |
) |
|
|
- |
|
| Unearned
revenue |
|
|
- |
|
|
|
- |
|
| Other
current liabilities |
|
|
858,176 |
|
|
|
- |
|
| Other
liabilities |
|
|
(238,000 |
) |
|
|
98,187 |
|
| Net
cash used in operating activities |
|
|
(24,138,317 |
) |
|
|
(2,907,857 |
) |
| |
|
|
|
|
|
|
|
|
| Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
| Purchase
of property and equipment |
|
|
(9,668,521 |
) |
|
|
(8,924,311 |
) |
| Purchase
of cannabis licenses |
|
|
(308,815 |
) |
|
|
- |
|
| Acquisitions |
|
|
(211,823 |
) |
|
|
13,494 |
|
| Investment
in third party companies |
|
|
- |
|
|
|
(800,000 |
) |
| Investment
in convertible debentures |
|
|
- |
|
|
|
(30,000,000 |
) |
| Investment
in notes receivable |
|
|
(2,680,000 |
) |
|
|
(550,000 |
) |
| Interest
on notes receivable |
|
|
211,989 |
|
|
|
(15,116 |
) |
| Proceeds
from notes receivable |
|
|
- |
|
|
|
45,553 |
|
| Proceeds
from sale of equipment |
|
|
- |
|
|
|
145,382 |
|
| Due
from related parties |
|
|
119,781 |
|
|
|
15,000 |
|
| Net
cash used in investing activities |
|
|
(12,537,389 |
) |
|
|
(40,069,998 |
) |
| |
|
|
|
|
|
|
|
|
| Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
| Issuance
of common stock |
|
|
2,750,000 |
|
|
|
31,821,001 |
|
| Issuance
of common stock subscriptions |
|
|
- |
|
|
|
55,620 |
|
| Issuance
of interest in subsidiary |
|
|
- |
|
|
|
- |
|
| Issuance
of promissory notes |
|
|
19,760,000 |
|
|
|
3,206,338 |
|
| Payments
on promissory notes |
|
|
- |
|
|
|
(700,000 |
) |
| Proceeds
from issuance of debentures |
|
|
9,600,000 |
|
|
|
10,007,094 |
|
| Proceeds
from mortgages |
|
|
- |
|
|
|
2,000,000 |
|
| Payments
on mortgages |
|
|
(200,081 |
) |
|
|
(114,141 |
) |
| Exercise
of stock options |
|
|
97,500 |
|
|
|
39,000 |
|
| Exercise
of warrants |
|
|
612,441 |
|
|
|
385,395 |
|
| Due
to related parties |
|
|
1,178,402 |
|
|
|
(217,451 |
) |
| Finance
lease principal payments |
|
|
(13,954 |
) |
|
|
- |
|
| Distributions |
|
|
(474,229 |
) |
|
|
(690,917 |
) |
| Net
cash provided by financing activities |
|
|
33,310,079 |
|
|
|
45,791,939 |
|
| |
|
|
|
|
|
|
|
|
| Net
change to cash and cash equivalents |
|
|
(3,365,627 |
) |
|
|
2,814,084 |
|
| Cash
and cash equivalents at beginning of period |
|
|
4,104,315 |
|
|
|
1,290,231 |
|
| Cash
and cash equivalents at end of period |
|
$ |
738,688 |
|
|
$ |
4,104,315 |
|
| |
|
|
|
|
|
|
|
|
| Supplemental
disclosure of cash flow information: |
|
|
|
|
|
|
|
|
| Cash
paid for interest |
|
$ |
1,294,810 |
|
|
$ |
1,286,007 |
|
| Cash
paid for income taxes |
|
$ |
52,126 |
|
|
$ |
12,584 |
|
| |
|
|
|
|
|
|
|
|
| Non-cash
activities: |
|
|
|
|
|
|
| Conversion
of debentures receivable |
|
$ |
30,000,000 |
|
|
$ |
- |
|
| Operating
lease right-of-use assets and liabilities |
|
$ |
7,251,837 |
|
|
$ |
- |
|
| Finance
lease right-of-use assets and liabilities |
|
$ |
172,605 |
|
|
$ |
- |
|
| Conversions
of debentures payable |
|
$ |
8,975,920 |
|
|
$ |
1,435,506 |
|
| Beneficial
conversion feature on debentures payable |
|
$ |
4,235,469 |
|
|
$ |
5,569,908 |
|
| Discount
on debentures payable |
|
$ |
1,148,056 |
|
|
$ |
1,057,833 |
|
| Discount
on promissory notes |
|
$ |
605,780 |
|
|
$ |
1,709,595 |
|
| Common
stock issued to settle debt |
|
$ |
1,047,100 |
|
|
$ |
7,589,788 |
|
| Common
stock issued to settle obligations |
|
$ |
120,864 |
|
|
$ |
18,540 |
|
| Common
stock issued for acquisitions |
|
$ |
2,470,840 |
|
|
$ |
266,682 |
|
| Common
stock issued for investments |
|
$ |
1,590,000 |
|
|
$ |
915,006 |
|
| Harvest
payment |
|
$ |
1,000 |
|
|
$ |
- |
|
| Conversion
of notes receivable to investment |
|
$ |
257,687 |
|
|
$ |
- |
|
| Issuance
of common stock associated with subscriptions |
|
$ |
169,123 |
|
|
$ |
370,000 |
|
| Conversion
of advances to notes receivable |
|
$ |
855,913 |
|
|
$ |
- |
|
| Exercise
of options via the reduction of 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 |
|
|
$ |
- |
|
| Conversions
of promissory notes |
|
$ |
- |
|
|
$ |
1,075,000 |
|
See
accompanying notes to consolidated financial
statements.
MariMed Inc.
Notes
to Consolidated Financial Statements
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
MariMed
Inc. (the “Company”) is a leader in the emerging cannabis industry.
The Company is an expert in the development, operation, management
and optimization of facilities for the cultivation, production and
dispensing of medicinal and recreational cannabis and
cannabis-infused products. To date, the Company has developed in
excess of 300,000 square feet of state-of-the-art,
regulatory-compliant facilities in five states – Delaware,
Illinois, Maryland, Massachusetts, and Nevada.
At
the outset of the Company’s entrance into the cannabis industry,
the Company provided advisory services and assistance to its
clients in the procurement of state-issued cannabis licenses,
leased its aforementioned cannabis facilities to these
newly-licensed clients, and provided industry-leading expertise and
oversight in all aspects of their cannabis operations, as well as
ongoing regulatory, accounting, human resources, and administrative
services. During this time, the Company successfully secured, on
behalf of its clients, 13 cannabis licenses across six states – two
in Delaware, three in Illinois, one in Nevada, one in Rhode Island,
three in Maryland, and three in Massachusetts.
Since
entering the cannabis industry, the Company has demonstrated an
excellent track record developing and operating licensed cannabis
facilities, implementing its proprietary operating procedures, and
industry best practices. In 2018, the Company commenced a strategic
plan to transition from an advisory firm that provides cannabis
licensing, operational consulting and real estate services, to a
direct owner of cannabis licenses and operator of seed-to-sale
operations, dedicated to the improvement of health and wellness
through the use of cannabinoids and cannabis products.
The
Company’s strategic plan consists of the acquisition of its
cannabis-licensed clients who currently lease the Company’s
facilities, and the consolidation of these entities under the
MariMed banner. The Company has played a key role in the successes
of these entities, from the securing of their cannabis licenses, to
the development of facilities that are models of excellence, to
providing operational and corporate guidance. Accordingly, the
Company believes it is well suited to own these facilities and
manage the continuing growth of their operations.
A
goal in completing this transition is to present a simpler, more
transparent financial picture to the investor community. Once the
consolidation is complete, the Company’s financial statements will
provide a clearer representation of the revenues, earnings, and
other financial metrics that the Company is generating, rather than
a fee-for-service revenue model that reports only consulting and
management fees, and does not reflect the full breadth of the
Company’s overall business.
To
date, acquisitions of the licensed businesses in Massachusetts and
Illinois have been state-approved and completed, with the remaining
entities located in Maryland, Nevada, and Rhode Island at various
stages of completion and state approvals as further discussed
below. When implemented, all of the Company’s cannabis-licensed
clients will be fully consolidated into the Company, establishing
it as a fully integrated seed-to-sale multistate operator of
licensed cannabis businesses.
Each
of the remaining potential acquisitions is subject to the
respective state’s approval under its laws governing the ownership
and transfer of cannabis licenses. The completion of the entire
plan requires a modification of current cannabis license ownership
laws in in Delaware and Rhode Island, and therefore there is no
assurance that the Company will be successful in fully implementing
its plan. However, the Company continues to develop additional
revenue and business in the states in which it operates and plans
to leverage its success in these markets to expand into other
states where cannabis is and becomes legal.
The
Company has also created its own brands of precision-dosed,
cannabis-infused products designed to treat specific health
conditions, alleviate medical symptoms, or achieve a certain
effect. These products are developed by the Company in cooperation
with state-licensed facilities and operators who meet the Company’s
strict standards, including all natural—not artificial or
synthetic—ingredients. The Company licenses its product
formulations only to knowledgeable manufacturing professionals who
agree to adhere to the Company’s precise scientific formulations
using its trademarked product recipes.
The
Company’s branded products are licensed under brand names including
Kalm Fusion™, Nature’s Heritage™, and Betty’s Eddies™, and are
distributed in the form of dissolvable strips, tablets, powders,
microwaveable popcorn, fruit chews, and with more varieties in
development. The Company also has exclusive sublicensing rights in
certain states to distribute DabTabs™ vaporization tablets infused
with cannabis concentrates, the Binske® line of cannabis products
made from premium artisan ingredients, and the clinically tested
medicinal cannabis strains developed in Israel by Tikun Olam™. The
Company intends to continue licensing and distributing its brands
as well as other top brands in the Company’s current markets and in
partnerships in other states markets across the country where
product sale is legal.
In
anticipation of the growing demand for hemp-derived cannabidiol
(“CBD”), in 2018, the Company invested $30.0 million in GenCanna
Global Inc. (“GenCanna”), a Kentucky-based cultivator, producer,
and distributor of hemp and GMP-quality CBD oils and isolates.
Concurrent with this investment, the Company acquired MediTaurus
LLC (“MediTaurus”), a company operating in the United States and
Europe that has developed proprietary CBD formulations under its
Florance™ brand.
The
transactions with GenCanna and MediTaurus, along with the Company’s
cannabis platform and product experience, enabled the Company to
expand into the emerging global CBD market just as the U.S Farm
Bill was adopted in late 2018 which descheduled industrial hemp and
hemp-derived CBD as controlled substances and classified them as
agricultural commodities. This new law enabled a new emerging
industry of CBD oils, isolates, and infused products within the
United States. In early 2019, the Company established a wholly
owned subsidiary, MariMed Hemp Inc. (“MariMed Hemp”) to market and
distribute hemp-derived CBD products across several vertical
markets.
The
Company’s stock is quoted on the OTCQX market under the ticker
symbol MRMD.
The
Company was incorporated in Delaware in January 2011 under the name
Worlds Online Inc. Initially, the Company developed and managed
online virtual worlds. By early 2014, this line of business
effectively ceased operating and the Company pivoted into the legal
cannabis industry.
Significant Transactions in the Current Period
During
2019, the Company, through its MariMed Hemp subsidiary, entered
into several hemp seed sale transactions with GenCanna whereby the
Company acquired large quantities of top-grade feminized hemp seeds
with proven genetics at volume discounts that it sold to GenCanna
at market rates. The seeds met the U.S. government’s definition of
federally legal industrial hemp, which was descheduled as a
controlled substance and classified as an agricultural commodity
upon the signing of the 2018 U.S. Farm Bill.
The
Company purchased $20.75 million of hemp seed inventory which it
sold and delivered to GenCanna for $33.2 million. The Company
provided GenCanna with extended payment terms through December
2019, to coincide with the completion of the seeds’ harvest,
although the payment by GenCanna was not contingent upon the
success of such harvest or its yield. To partially fund the seed
purchases, the Company raised $17.0 million in debt financings
which is reflected in Notes Payable on the balance sheet and
further discussed in Note 11 – Debt.
By the end
of 2019, GenCanna had not paid the amount it owed the Company for
its seed purchases due to several challenges it faced late in the
year, including a fire at its main processing and lab facility, the
domestic decline of CBD selling prices, and the contraction of the
cannabis capital markets. In February 2020, GenCanna filed for
voluntary reorganization under Chapter 11 with the U.S. Bankruptcy
Court in the Eastern District of Kentucky. The filing is intended
to permit GenCanna to operate its business while working through a
reorganization plan that could include refinancing of its existing
indebtedness, or an alternative restructuring transaction such as a
sale.
As
required by the relevant accounting guidance, the Company initially
recorded the $33.2 million due from GenCanna as a related party
receivable, with approximately $29.0 million recognized as related
party revenue, and approximately $4.2 million classified as
unearned revenue (such amount representing the Company’s 33.5%
ownership portion of the profit on these transactions, which was to
have been recognized as revenue upon payment by GenCanna). As a
result of GenCanna’s Chapter 11 filing, the Company wrote off the
receivable balance of approximately $29.0 million and the entire
unearned revenue balance of approximately $4.2 million.
Additionally, the Company recorded a charge to net income of
approximately $30.2 million, which reduced to zero the carrying
value of the Company’s investment in GenCanna.
In
addition to the foregoing adjustments, the Company recorded bad
debt reserves in 2019 against the receivable and working capital
balances due from (i) Kind of approximately $11.2 million in the
aggregate, in light of the ongoing litigation between the Company
and Kind, and (ii) Harvest of approximately $2.2 million in the
aggregate, due to the anticipated effect on Harvest’s operations
from a weakened local economy due to the coronavirus pandemic.
These charges are further described in Note 6 – Due From Third
Parties and Note 17 – Bad Debts.
The
Company expects the coronavirus pandemic to likewise have a
negative impact on the operations of certain entities in which the
Company has invested and to whom the Company has extended loans.
For that reason, the Company also wrote off (i) three notes
receivable balances of approximately $1.6 million in the aggregate,
(ii) goodwill of approximately 2.7 million associated with the
Company’s acquisition of MediTaurus, and (iii) the carrying value
of a $500,000 investment. These items are further described in Note
3 – Acquisitions, Note 4 – Investments, and Note 7 –
Notes Receivable.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The
accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America (“GAAP”).
Certain
reclassifications have been made to prior periods’ data to conform
to the current period presentation. These reclassifications had no
effect on reported income (losses) or cash flows.
Going Concern
In
connection with the preparation of its financial statements for the
year ended December 31, 2019, the Company’s management evaluated
the Company’s ability to continue as a going concern in accordance
with the ASU 2014-15, Presentation of Financial Statements–Going
Concern (Subtopic 205-40), which requires an assessment of
relevant conditions or events, considered in the aggregate, that
are known or reasonably knowable by management on the issuance
dates of the financial statements which indicated the probable
likelihood that the Company will be unable to meet its obligations
as they become due within one year after the issuance date of the
financial statements.
As
part of its evaluation, management assessed known events, trends,
commitments, and uncertainties, which at the time included the
status of its consolidation plan, the GenCanna bankruptcy, the
amount of capital raised by the Company during the past two
calendar years, the recent level of cannabis industry investment
activity, the stock price movement of public cannabis companies,
the actions and/or results of certain bellwether cannabis
companies, the measure of cannabis investor confidence, and the
changes to state laws with respect to adult-use recreational and
medical cannabis use.
At
December 31, 2019, the Company had negative working capital of
approximately $31.0 million, and for the year then ended, incurred
negative cash flow from operations of approximately $24.8 million.
For further discussion on these metrics and the Company’s liquidity
and capital resources, please refer to Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations of the Company’s Form 10-K for the fiscal year ended
December 31, 2019.
In early
2020, the Company raised approximately $4.4 million as part of an
exchange agreement with two institutional stockholders, and
$935,000 from the issuance of convertible debentures. Additionally,
the Company has extended the maturity dates of approximately $19.4
million of promissory notes, and is in the process of finalizing
the documentation to extend another $3.0 million of promissory
notes. These transactions are further disclosed in Note 21 –
Subsequent Events.
Moreover,
as of the filing date of this report, the Company has obtained a
commitment from an accredited investor for a $12.0 million loan,
secured by the Company’s real estate, at a rate of 10% per annum
with a one-year term, and an option to extend for an additional
year. This transactions is expected to close upon the lender’s
completion of its due diligence, which is in its final stages,
although there is no assurance that it will close in the
foreseeable future or at all. Also as of the filing date of this
report, the Company is in discussions with financial institutions
to consider generating liquidity from the Company’s unencumbered
real property through mortgage-backed financings, the refinancing
of certain outstanding mortgage loans, the sales-leaseback of
certain properties, and/or a combination thereof. Based on
preliminary discussions, such financings could potentially generate
upwards of $17.0 million from such transactions, however the
Company has not signed any commitments it has received to date and
there are no assurances that it will.
In
addition to the aforementioned financing transactions that have
been consummated and that are in progress, the operations of the
Company’s recently acquired entities in Illinois and Massachusetts
are expected to generate considerable liquidity and working capital
for the Company. The state of Illinois legalized adult-use cannabis
in January 2020, which was added to the Company’s two existing
cannabis licenses, thereby increasing the Company’s operations in
this state to service both medical and recreational cannabis
consumers. In Massachusetts, the cultivation and production
facility acquired by the Company will soon complete its first
harvest and commence full scale selling operations in this state’s
robust cannabis market.
The
Company believes that it will close incremental debt financings in
the foreseeable future, and it projects that its operating profit
will organically support its day-to-day operations by the latter
part of 2020. However, since there are no assurances that another
financing transaction will be consummated, or that the Company will
meet or exceed its projections in light of the unknown current
state of the global economy, there are similarly no assurances that
the Company will be able to meet all of its obligations as they
become due within one year after the issuance date of these
financial statements
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of MariMed Inc. and the following majority-owned
subsidiaries:
|
Subsidiary: |
|
Percentage
Owned |
|
|
MariMed
Advisors Inc. |
|
|
100.0 |
% |
|
Mia
Development LLC |
|
|
89.5 |
% |
|
Mari
Holdings IL LLC |
|
|
100.0
|
% |
|
Mari
Holdings MD LLC |
|
|
97.4 |
% |
|
Mari
Holdings NV LLC |
|
|
100.0 |
% |
|
Hartwell
Realty Holdings LLC |
|
|
100.0 |
% |
|
iRollie
LLC |
|
|
100.0 |
% |
|
ARL
Healthcare Inc. |
|
|
100.0 |
% |
|
KPG of
Anna LLC
|
|
|
100.0
|
% |
|
KPG of
Harrisburg LLC |
|
|
100.0
|
% |
|
MariMed
Hemp Inc. |
|
|
100.0 |
% |
|
MediTaurus
LLC |
|
|
70.0 |
% |
Intercompany
accounts and transactions have been eliminated.
Use of Estimates
The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts within the financial statements and
disclosures thereof. Actual results could differ from these
estimates or assumptions.
Cash Equivalents
The
Company considers all highly liquid investments with a maturity
date of three months or less to be cash equivalents. The fair
values of these investments approximate their carrying
values.
The
Company’s cash and cash equivalents are maintained with recognized
financial institutions located in the United States. In the normal
course of business, the Company may carry balances with certain
financial institutions that exceed federally insured limits. The
Company has not experienced losses on balances in excess of such
limits and management believes the Company is not exposed to
significant risks in that regard.
Accounts Receivable
Accounts
receivable consist of trade receivables and are carried at their
estimated collectible amounts.
The
Company provides credit to its clients in the form of payment
terms. The Company limits its credit risk by performing credit
evaluations of its clients and maintaining a reserve, if deemed
necessary, for potential credit losses. Such evaluations include
the review of a client’s outstanding balances with consideration
towards such client’s historical collection experience, as well as
prevailing economic and market conditions and other factors. Based
on such evaluations, the Company maintained a reserve of
approximately $10.7 million and $150,000 at December 31, 2019 and
2018, respectively. The 2019 reserve primarily consisted of
reserves against the accounts receivable balances of Kind of
approximately $9.7 million and Harvest of approximately $239,000,
as further disclosed in Note 17 – Bad Debts.
Inventory
Inventory
is carried at the lower of cost or net realizable value, with the
cost being determined on a first-in, first-out (FIFO) basis. The
Company allocates a certain percentage of overhead cost to its
manufactured inventory; such allocation is based on square footage
and other industry-standard criteria. The Company reviews physical
inventory for obsolescence and/or excess and will record a reserve
if necessary. As of the date of this report, no reserve was deemed
necessary.
Investments
Investments are
comprised of equity holding of private companies. These investments
are recorded at fair value on the Company’s consolidated balance
sheet, with changes to fair value included in income. Investments
are evaluated for permanent impairment and are written down if such
impairments are deemed to have occurred.
Revenue Recognition
On
January 1, 2018, the Company adopted the Financial Accounting
Standards Board’s Accounting Standards Codification (“ASC”) 606,
Revenue from Contract with Customers, as amended by
subsequently issued Accounting Standards Updates. This revenue
standard requires an entity to recognize revenue to depict the
transfer of goods or services to customers in an amount that
reflects the consideration that it expects to be entitled to in
exchange for those goods or services. The recognition of revenue is
determined by performing the following consecutive
steps:
|
|
● |
Identify
the contract(s) with a customer; |
| |
● |
Identify
the performance obligations in the contract(s); |
| |
● |
Determine
the transaction price; |
| |
● |
Allocate
the transaction price to the performance obligations in the
contract(s); and |
| |
● |
Recognize
revenue as the performance obligation is satisfied. |
Additionally,
when another party is involved in providing goods or services to
the Company’s clients, a determination is made as to who—the
Company or the other party—is acting in the capacity as the
principal in the sale transaction, and who is merely the agent
arranging for goods or services to be provided by the other
party.
The
Company is typically considered the principal if it controls the
specified good or service before such good or service is
transferred to its client. The Company may also be deemed to be the
principal even if it engages another party (an agent) to satisfy
some of the performance obligations on its behalf, provided the
Company (i) takes on certain responsibilities, obligations and
risks, (ii) possesses certain abilities and discretion, or (iii)
other relevant indicators of the sale. If deemed an agent, the
Company would not recognize revenue for the performance obligations
it does not satisfy.
The
adoption of this standard did not have a significant impact on the
Company’s consolidated operating results, and accordingly no
restatement has been made to prior period reported
amounts.
The
Company’s main sources of revenue are comprised of the
following:
|
|
● |
Real
Estate – rental income and additional rental fees from leasing of
the Company’s regulatory-compliant cannabis facilities to its
clients, which are cannabis-licensed operating companies. Rental
income is generally a fixed amount per month that escalates over
the respective lease terms, while additional rental fees are based
on a percentage of tenant revenues that exceed a specified
amount. |
| |
|
|
| |
● |
Management
– fees for providing the Company’s cannabis clients with corporate
services and operational oversight of their cannabis cultivation,
production, and dispensary operations. These fees are based on a
percentage of such clients’ revenue, and are recognized after
services have been performed. |
| |
|
|
| |
● |
Supply
Procurement – the Company maintains volume discounts with top
national vendors of cultivation and production resources, supplies,
and equipment, which the Company acquires and resells to its
clients or third parties within the cannabis industry. The Company
recognizes this revenue after the delivery and acceptance of goods
by the purchaser. |
| |
|
|
| |
● |
Licensing
– revenue from the sale of precision-dosed, cannabis-infused
products, such as Kalm Fusion™ and Betty’s Eddies™, to legal
dispensaries throughout the United States. The recognition of this
revenue occurs when the products are delivered. |
| |
|
|
| |
● |
Consulting
– fees from third-parties where the Company provides assistance in
securing cannabis licenses, and advisory services in the areas of
facility design and development, and cultivation and dispensing
best practices. These fees are recognized as the services are
performed. |
| |
|
|
| |
● |
Product
Sales – direct sales of cannabis, hemp, and products derived from
these plants. During 2019, such revenue was generated from (i) the
post-acquisition dispensary operations of both ARL in Massachusetts
and the KPGs in Illinois, and (ii) the sales of hemp and CBD
products by MariMed Hemp and MediTaurus. This revenue is recognized
when products are delivered or at retail
points-of-sale. |
Research and Development Costs
Research
and development costs are charged to operations as
incurred.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation,
with depreciation recognized on a straight-line basis over the
shorter of the estimated useful life of the asset or the lease
term, if applicable. When assets are retired or disposed, the cost
and accumulated depreciation are removed from the accounts, and any
resulting gains or losses are included in income. Repairs and
maintenance are charged to expense in the period
incurred.
The
estimated useful lives of property and equipment are generally as
follows: buildings and building improvements, seven to thirty-nine
years; tenant improvements, the remaining duration of the related
lease; furniture and fixtures, seven years; machinery and
equipment, five to ten years. Land is not depreciated.
The
Company’s property and equipment are individually reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable from
the undiscounted future cash flows of such asset over the
anticipated holding period. An impairment loss is measured by the
excess of the asset’s carrying amount over its estimated fair
value.
Impairment
analyses are based on management’s current plans, asset holding
periods, and currently available market information. If these
criteria change, the Company’s evaluation of impairment losses may
be different and could have a material impact to the consolidated
financial statements.
For
the years ended December 31, 2019 and 2018, based on the results of
management’s impairment analyses, there were no impairment
losses.
Leases
The
consolidated financial statements reflect the Company’s adoption of
ASC 842, Leases, as amended by subsequent accounting
standards updates, utilizing the modified retrospective transition
approach which calls for applying the new standard to all of the
Company’s leases effective January 1, 2019, which is the effective
date of adoption.
ASC
842 is intended to improve financial reporting of leasing
transactions. The most prominent change from previous accounting
guidance is the requirement to recognize right-of-use assets and
lease liabilities on the consolidated balance sheet representing
the rights and obligations created by operating leases that extend
more than twelve months in which the Company is the lessee. The
Company elected the package of practical expedients permitted under
ASC 842. Accordingly, the Company accounted for its existing
operating leases that commenced before the effective date as
operating leases under the new guidance without reassessing (i)
whether the contracts contain a lease, (ii) the classification of
the leases (iii) the accounting for indirect costs as defined in
ASC 842.
The
Company determines if an arrangement is a lease at inception.
Right-of-use assets represent the Company’s right to use an
underlying asset for the lease term and lease liabilities represent
the Company’s obligation to make lease payments arising from the
lease. Non-lease components within lease agreements are accounted
for separately. Right-of-use assets and obligations are recognized
at the commencement date based on the present value of lease
payments over the lease term, utilizing the Company’s incremental
borrowing rate. The Company’s lease terms may include options to
extend or terminate the lease when it is reasonably certain that
the Company will exercise that option. Lease expense for lease
payments is recognized on a straight-line basis over the lease
term.
Impairment of Long-Lived Assets
The
Company evaluates the recoverability of its fixed assets and other
assets in accordance with ASC 360-10-15, Impairment or Disposal
of Long-Lived Assets. Impairment of long-lived assets is
recognized when the net book value of such assets exceeds their
expected cash flows, in which case the assets are written down to
fair value, which is determined based on discounted future cash
flows or appraised values.
Fair Value of Financial Instruments
The
Company follows the provisions of ASC 820, Fair Value
Measurement, to measure the fair value of its financial
instruments, and ASC 825, Financial Instruments, for
disclosures on the fair value of its financial instruments. To
increase consistency and comparability in fair value measurements
and related disclosures, ASC 820 establishes a fair value hierarchy
which prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels. The fair value
hierarchy gives the highest priority to quoted prices (unadjusted)
in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. The three levels of fair
value hierarchy defined by ASC 820 are:
|
Level
1 |
Quoted
market prices available in active markets for identical assets or
liabilities as of the reporting date. |
|
|
|
|
Level
2 |
Pricing
inputs other than quoted prices in active markets included in Level
1, which are either directly or indirectly observable as of the
reporting date. |
|
|
|
|
Level
3 |
Pricing
inputs that are generally observable inputs and not corroborated by
market data. |
The
carrying amounts of the Company’s financial assets and liabilities,
such as cash and accounts payable approximate their fair values due
to the short maturity of these instruments.
The
fair value of option and warrant issuances are determined using the
Black-Scholes pricing model and employing several inputs such as
the expected life of instrument, the exercise price, the expected
risk-free interest rate, the expected dividend yield, the value of
the Company’s common stock on issuance date, and the expected
volatility of such common stock. The following table summarizes the
range of inputs used by the Company during the prior two fiscal
years:
|
|
|
2019 |
|
|
2018 |
|
| Life of
instrument |
|
|
1.5
to 4.0
years |
|
|
|
0.5
to 5.0 years |
|
|
Volatility
factors |
|
|
1.039
to
1.106 |
|
|
|
1.019
to
2.086 |
|
|
Risk-free
interest rates |
|
|
1.42%
to 2.28% |
|
|
|
1.65%
to
3.07% |
|
|
Dividend
yield |
|
|
0% |
|
|
|
0% |
|
The
expected life of an instrument is calculated using the simplified
method pursuant to Staff Accounting Bulletin Topic 14,
Share-Based Payment, which allows for using the mid-point
between the vesting date and expiration date. The volatility
factors are based on the historical two-year movement of the
Company’s common stock prior to an instrument’s issuance date. The
risk-free interest rate is based on U.S. Treasury rates with
maturity periods similar to the expected instruments life on the
issuance date.
The
Company amortizes the fair value of option and warrant issuances on
a straight-line basis over the requisite service period of each
instrument.
Extinguishment of Liabilities
The
Company accounts for extinguishment of liabilities in accordance
with ASC 405-20, Extinguishments of Liabilities. When the
conditions for extinguishment are met, the liabilities are written
down to zero and a gain or loss is recognized.
Stock-Based Compensation
The
Company accounts for stock-based compensation using the fair value
method as set forth in ASC 718, Compensation—Stock
Compensation, which requires a public entity to measure the
cost of employee services received in exchange for an equity award
based on the fair value of the award on the grant date, with
limited exceptions. Such value will be incurred as compensation
expense over the period an employee is required to provide service
in exchange for the award, usually the vesting period. No
compensation cost is recognized for equity awards for which
employees do not render the requisite service.
Income Taxes
The
Company accounts for income taxes in accordance with ASC 740,
Income Taxes. Deferred income tax assets and liabilities are
determined based upon differences between the financial reporting
and tax basis of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Deferred tax assets are
reduced by a valuation allowance to the extent management concludes
it is more likely than not that the assets will not be realized.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the consolidated statements of
operations in the period that includes the enactment
date.
ASC
740 prescribes a comprehensive model for how companies should
recognize, measure, present, and disclose in their financial
statements uncertain tax positions taken or expected to be taken on
a tax return. The Company did not take any uncertain tax positions
and had no adjustments to unrecognized income tax liabilities or
benefits for the years ended December 31, 2019 and 2018.
Related Party Transactions
The
Company follows ASC 850, Related Party Disclosures, for the
identification of related parties and disclosure of related party
transactions.
In
accordance with ASC 850, the Company’s financial statements include
disclosures of material related party transactions, other than
compensation arrangements, expense allowances, and other similar
items in the ordinary course of business, as well as transactions
that are eliminated in the preparation of financial
statements.
Comprehensive Income
The
Company reports comprehensive income and its components following
guidance set forth by ASC 220, Comprehensive Income, which
establishes standards for the reporting and display of
comprehensive income and its components in the consolidated
financial statements. There were no items of comprehensive income
applicable to the Company during the period covered in the
financial statements.
Earnings Per Share
Earnings
per common share is computed pursuant to ASC 260, Earnings Per
Share. Basic earnings per share is computed by dividing net
income by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per share is
computed by dividing net income by the sum of the weighted average
number of shares of common stock outstanding plus the weighted
average number of potentially dilutive securities during the
period.
As of
December 31, 2019 and 2018, there were 18,051,357 and 18,916,211,
respectively, of potentially dilutive securities in the form of
outstanding options and warrants. Also as of such dates, there were
(i) $10.0 million and $8.6 million, respectively, of outstanding
convertible debentures payable, and (ii) $350,000 of outstanding
convertible promissory notes in both years, that were potentially
dilutive, whose conversion into common stock is based on a discount
to the market value of common stock on or about the future
conversion date.
For
the years ended December 31, 2019 and 2018, all potentially
dilutive securities had an anti-dilutive effect on earnings per
share, and in accordance with ASC 260, were excluded from the
diluted net income per share calculations, resulting in identical
basic and fully diluted net income per share for these periods. The
potentially dilutive securities may dilute earnings per share in
the future.
Commitments and Contingencies
The
Company follows ASC 450, Contingencies, which requires the
Company to assess the likelihood that a loss will be incurred from
the occurrence or non-occurrence of one or more future events. Such
assessment inherently involves an exercise of judgment. In
assessing possible loss contingencies from legal proceedings or
unasserted claims, the Company evaluates the perceived merits of
such proceedings or claims, and of the relief sought or expected to
be sought.
If
the assessment of a contingency indicates that it is probable that
a material loss will be incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in
the Company’s financial statements. If the assessment indicates
that a potentially material loss contingency is not probable but is
reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability, and an estimate of the
range of possible losses, if determinable and material, would be
disclosed. Loss contingencies considered remote are generally not
disclosed unless they involve guarantees, in which case the
guarantees would be disclosed.
While
not assured, management does not believe, based upon information
available at this time, that a loss contingency will have material
adverse effect on the Company’s financial position, results of
operations or cash flows.
Beneficial Conversion Features on Convertible
Debt
Convertible
instruments that are not bifurcated as a derivative pursuant to ASC
815, Derivatives and Hedging, and not accounted for as a
separate equity component under the cash conversion guidance are
evaluated to determine whether their conversion prices create an
embedded beneficial conversion feature at inception, or may become
beneficial in the future due to potential adjustments.
A
beneficial conversion feature is a nondetachable conversion feature
that is “in-the-money” at the commitment date. The in-the-money
portion, also known as the intrinsic value of the option, is
recorded in equity, with an offsetting discount to the carrying
amount of convertible debt to which it is attached. The discount is
amortized to interest expense over the life of the debt with
adjustments to amortization upon full or partial conversions of the
debt.
Risk and Uncertainties
The
Company is subject to risks common to companies operating within
the legal and medical marijuana industries, including, but not
limited to, federal laws, government regulations and jurisdictional
laws.
Noncontrolling Interests
Noncontrolling
interests represent third-party minority ownership of the Company’s
consolidated subsidiaries. Net income attributable to
noncontrolling interests is shown in the consolidated statements of
operations; and the value of net assets owned by noncontrolling
interests are presented as a component of equity within the balance
sheets.
Off Balance Sheet Arrangements
The
Company does not have any off-balance sheet
arrangements.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, Intangibles -
Goodwill and Other (Topic 350) which simplifies goodwill
impairment testing by requiring that such periodic testing be
performed by comparing the fair value of a reporting unit with its
carrying amount and recognizing an impairment charge for the amount
by which the carrying amount exceeds the reporting unit’s fair
value. The Company is currently evaluating the impact of this ASU
on its consolidated financial statements and related disclosures,
which is effective for fiscal years, including interim periods,
beginning after December 15, 2019.
In
addition to the above, the Company has reviewed all other recently
issued, but not yet effective, accounting pronouncements, and does
not believe the future adoption of any such pronouncements will
have a material impact on its financial condition or the results of
its operations.
NOTE
3 – ACQUISITIONS
ARL Healthcare Inc.
In
October 2018, the Company’s cannabis-licensed client in
Massachusetts, ARL Healthcare Inc. (“ARL”), filed a plan of entity
conversion with the state to convert from a non-profit entity to a
for-profit corporation, with the Company as the sole shareholder of
the for-profit corporation. ARL holds three cannabis licenses from
the state of Massachusetts for the cultivation, production and
dispensing of cannabis.
On
November 30, 2018, the conversion plan was approved by the
Massachusetts Secretary of State, and effective December 1, 2018,
ARL was consolidated into the Company as a wholly-owned
subsidiary.
The
acquisition was accounted for in accordance with ASC 805,
Business Combinations. The following table summarizes the
allocation of the purchase price to the fair value of the assets
acquired and liabilities assumed on the acquisition
date:
|
Equipment |
|
$ |
21,000 |
|
|
Cannabis
licenses |
|
|
185,000 |
|
|
Accounts
payable |
|
|
(120,689 |
) |
|
Due to
related parties |
|
|
(92,765 |
) |
|
Total
identifiable net assets |
|
|
(7,454 |
) |
|
Goodwill |
|
|
731,902 |
|
|
Total fair
value of consideration |
|
$ |
724,448 |
|
The
total consideration paid by the Company was equal to the
forgiveness of amounts owed to the Company by ARL. Accordingly, the
transaction gave rise to goodwill of approximately $732,000, which
the Company wrote off in 2018. The balance of acquired cannabis
licenses was included in Intangibles within the asset
section of the Company’s balance sheet at December 31, 2018. This
intangible asset was fully amortized by December 2019.
In
2019, the Company paid for the annual renewal ARL’s cannabis
license. At December 31, 2019, the carrying value less amortization
was approximately $138,000.
KPG of Anna LLC and KPG of Harrisburg LLC
In
October 2018, the Company entered into a purchase agreement to
acquire 100% of the ownership interests of KPG of Anna LLC and KPG
of Harrisburg LLC, the Company’s two cannabis-licensed clients that
operate medical marijuana dispensaries in the state of Illinois
(both entities collectively, the “KPGs”), from the current
ownership group of the KPGs (the “Sellers”). As part of this
transaction, the Company also acquired the Sellers’ ownership
interests of Mari Holdings IL LLC, the Company’s subsidiary which
owns the real estate in which the KPGs’ dispensaries are located
(“Mari-IL”).
In October
2019, the transaction was approved by the Illinois Department of
Financial & Professional Regulation, and 1,000,000 shares of
the Company’s common stock, representing the entire purchase price,
were issued to the Sellers. Effective October 1, 2019, the KPGs and
Mari-IL became wholly-owned subsidiaries of the Company with 100%
of the operations of these entities consolidated into the Company’s
financial statements as of that date. The KPGs contributed revenues
of approximately $1.3 million and pretax income of approximately
$79,000 since the date of acquisition.
The
acquisition was accounted for in accordance with ASC 805. The
following table summarizes the allocation of the purchase price to
the fair value of the assets acquired and liabilities assumed on
the acquisition date:
|
Cash
and cash equivalents |
|
$ |
443,980 |
|
|
Inventory |
|
|
113,825 |
|
| Intangibles |
|
|
2,067,727 |
|
| Minority
interests |
|
|
138,356 |
|
| Accounts
payable |
|
|
(642,033 |
) |
| Accrued
expenses |
|
|
(186,005 |
) |
| Due
to third parties |
|
|
(1,020,850 |
) |
| Total
fair value of consideration |
|
$ |
915,000 |
|
Consolidated unaudited
pro forma results of operations for the Company are presented below
assuming this 2019 acquisition had occurred at January 1, 2018, the
beginning of the reporting period of these financial
statements.
| |
|
Year
Ended December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| Total
revenues |
|
$ |
48,444,052 |
|
|
$ |
14,417,923 |
|
| |
|
|
|
|
|
|
|
|
| Net
income (loss) |
|
$ |
(81,705,403 |
) |
|
$ |
(13,514,832 |
) |
| |
|
|
|
|
|
|
|
|
| Net
income (loss) per share |
|
$ |
(0.39 |
) |
|
$ |
(0.07 |
) |
Pro forma
financial information is not necessarily indicative of the
Company’s actual results if the transaction had been completed
during the periods reflected above, nor is it necessarily an
indication of future operating results. Amounts do not include any
operating efficiencies or costs savings that the Company would have
been able to achieve.
The Harvest Foundation LLC
In
November 2018, the Company issued a letter of intent to acquire
100% of the ownership interests of The Harvest Foundation LLC
(“Harvest”), the Company’s cannabis-licensed client in the state of
Nevada. In August 2019, the parties entered into a purchase
agreement governing the transaction. The acquisition is conditioned
upon legislative approval of the transaction, which is expected to
occur by the end of 2020. Upon consummation, the operations of
Harvest will be consolidated into the Company’s financial
statements.
The
purchase price is comprised of the issuance of (i) 1,000,000 shares
of the Company’s common stock, in the aggregate, to two owners of
Harvest, which as a good faith deposit, were issued upon execution
of the purchase agreement, (ii) $1.2 million of the Company’s
common stock at closing, based on the closing price of the common
stock on the day prior to legislative approval of the transaction,
and (iii) warrants to purchase 400,000 shares of the Company’s
common stock at an exercise price equal to the closing price of the
Company’s common stock on the day prior to legislative approval of
the transaction. These shares are restricted and will be returned
to the Company in the event the transaction does not close by a
date certain. As the transaction has not been consummated, the
issued shares were recorded at par value within the
Stockholders’ Equity section of the balance sheet at
December 31, 2019.
Kind Therapeutics USA Inc.
In
December 2018, the Company entered into a memorandum of
understanding (“MOU”) to acquire Kind Therapeutics USA Inc.
(“Kind”), its client in Maryland that holds licenses for the
cultivation, production, and dispensing of medical cannabis. The
MOU provides for a total purchase price of $6.3 million in cash,
2,500,000 shares of the Company’s common stock, and other
consideration. The acquisition is subject to the approval by the
Maryland Medical Cannabis Commission, which approval is not
expected prior to October 2020.
Also in
December 2018, MariMed Advisors Inc, the Company’s wholly owned
subsidiary, and Kind entered into a management agreement pursuant
to which the Company provides comprehensive management services in
connection with the business and operations of Kind, and Mari
Holdings MD LLC, the Company’s majority-owned subsidiary, entered
into a 20-year lease with Kind for its utilization of the Company’s
180,000 square foot cultivation and production facility in
Hagerstown, MD. Additionally, in October 2019, Mari Holdings MD LLC
purchased a 9,000 square foot building in Anne Arundel County, MD
for the development of a dispensary which would be leased to
Kind.
Recently,
the sellers of Kind have attempted to renegotiate the terms of the
MOU. Even though the MOU contains all the definitive material terms
with respect to the acquisition transaction and confirms the
management and lease agreements, the selling parties now allege
that the MOU is not an enforceable agreement. The Company engaged
with the sellers in good faith in an attempt to reach updated terms
acceptable to both parties, however the sellers failed to
reciprocate in good faith, resulting in an impasse, resulting in
both parties commencing legal proceedings. For further information,
see Part II, Item 1. Legal Proceedings in this
report.
MediTaurus LLC
In May
2019, the Company entered into a purchase agreement to acquire
MediTaurus LLC (“MediTaurus”), a company formed and owned by
Jokubas Ziburkas PhD, a neuroscientist and leading authority on CBD
and its interactions with the brain and endocannabinoid system.
MediTaurus currently operates in the United States and Europe and
has developed proprietary CBD formulations sold under its Florance™
brand.
Pursuant
to the purchase agreement, the Company acquired 70% of MediTaurus
on June 1, 2019, and will acquire the remaining 30% of MediTaurus
on June 1, 2020. The purchase price for the initial 70% was $2.8
million, comprised of cash payments totaling $720,000 and 520,000
shares of the Company’s common stock valued at $2,080,000. The
purchase price of the remaining 30%, payable in cash or stock at
the Company’s option, shall be equal to a defined percentage of the
Company’s receipts from the licensing of certain MediTaurus
technology and products that existed on June 1, 2019 (all such
technology and products, the “MT Property”). For a period of ten
years following June 1, 2020, certain former members of MediTaurus
shall be paid a royalty on the Company’s receipts from the
licensing of MT Property, with the royalty percentage commencing at
10% and decreasing to 2% over time.
The
acquisition was accounted for in accordance with ASC 10. The
following table summarizes the allocation, adjusted in September
2019, of the purchase price to the fair value of the assets
acquired and liabilities assumed on the acquisition
date:
|
Cash and
cash equivalents |
|
$ |
64,196 |
|
|
Accounts
receivable |
|
|
5,362 |
|
|
Inventory |
|
|
519,750 |
|
|
Goodwill |
|
|
2,662,669
|
|
|
Accounts
payable |
|
|
(777 |
) |
|
Total
value of MediTaurus |
|
|
3,251,200 |
|
|
Noncontrolling
interests in MediTaurus |
|
|
(975,360 |
) |
|
Total fair
value of consideration |
|
$ |
2,275,840 |
|
Based on a
valuation of MediTaurus in late 2019, the goodwill on the
transaction was adjusted to approximately $2.7 million, which was
written off in expectation of the impact of the coronavirus
pandemic on MediTaurus’ business.
As
part of the transaction, the Company hired Dr. Ziburkas as the
Company’s Chief Innovation Officer, as well as other members of the
MediTaurus executive team.
iRollie
LLC
Effective
April 2018, the Company entered into a purchase agreement whereby
264,317 shares of the Company’s common stock were exchanged for
100% of the ownership interests of iRollie LLC (“iRollie”), a
manufacturer of branded cannabis products and accessories for
consumers, and custom product and packaging for companies in the
cannabis industry. The Company acquired, among other assets,
iRollie’s entire product line, service offerings, client list, and
intellectual property, and hired its two co-founders.
The
acquisition was accounted for in accordance with ASC 10. The shares
of Company common stock, valued at approximately $280,000, were
issued to iRollie’s former owners in December 2018, at which time
the Company adjusted the total goodwill generated by the
transaction. The following table summarizes the allocation of the
purchase price to the fair value of the assets acquired:
| Cash
and cash equivalents |
|
$ |
13,494 |
|
| Goodwill |
|
|
266,682 |
|
| Total
fair value of consideration |
|
$ |
280,176 |
|
Prior to
the acquisition, iRollie had not been generating positive cash flow
as a stand-alone entity, and in conformity with relevant accounting
guidance, the goodwill was written off.
AgriMed Industries of PA LLC
In
July 2018, the Company entered into a purchase agreement to acquire
100% of the ownership interests of AgriMed Industries of PA LLC
(“AgriMed”), an entity that holds a license from the state of
Pennsylvania for the cultivation of cannabis. The purchase price
was comprised of $8 million, payable in stock and cash, and the
assumption of certain liabilities of AgriMed. In February 2019, the
Company commenced legal proceedings against AgriMed seeking
specific performance of the purchase agreement.
In
May 2019, the dispute between the parties was resolved through the
cash payment to the Company of $3.1 million and other good and
valuable consideration, in exchange for the Company relinquishing
its rights under the purchase agreement and releasing its claims
against AgriMed. The net amount of approximately $2,949,000,
representing the cash payment less legal fees and write-offs of
assets and supplies, was recorded in Other Non-Operating
Income in the Company’s consolidated statement of operations
for the year ended December 31, 2019.
NOTE
4 – INVESTMENTS
At
December 31, 2019 and 2018, the Company’s investments were
comprised of the following:
|
|
|
2019 |
|
|
2018 |
|
|
Current
investments: |
|
|
|
|
|
|
|
|
|
Terrace
Inc. |
|
$ |
1,449,144 |
|
|
$ |
- |
|
|
Total
current investments |
|
$ |
1,449,144
|
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
investments: |
|
|
|
|
|
|
|
|
|
GenCanna
Global Inc. |
|
|
- |
|
|
|
- |
|
|
CVP
Worldwide LLC |
|
|
1,066,975 |
|
|
|
1,172,163 |
|
|
Iconic
Ventures Inc. |
|
|
- |
|
|
|
500,000 |
|
|
Chooze
Corp. |
|
|
257,686 |
|
|
|
- |
|
|
Total
non-current investments |
|
|
1,324,661 |
|
|
|
1,672,163 |
|
|
Total
investments |
|
$ |
2,773,805 |
|
|
$ |
1,672,163 |
|
Terrace
Inc.
In May
2019, the Company issued 500,000 shares of its common stock, valued
at $1.59 million on the date of issuance, to purchase an 8.95%
interest in Terrace Inc. (“Terrace”), a Canadian entity that
develops and acquires international cannabis assets. The Company
has no board representation, nor does it have the ability to exert
operational or financial control over the entity.
In
November 2019, the common stock of Terrace commenced public trading
on the Toronto Stock Venture Exchange. In accordance with ASC 321,
Investments – Equity Securities, this investment is carried
at fair value, with changes to fair value recognized in net income.
Prior to Terrace becoming publicly traded, the Company had elected
the measurement alternative to value this equity investment without
a readily determinable fair value.
At
December 31, 2019, the carrying amount of this investment declined
to approximately $1.45 million, based on its fair value on such
date, and the Company recorded a charge to net income of
approximately $141,000.
GenCanna Global Inc.
During
2018, in a series of transactions, the Company purchased $30
million of subordinated secured convertible debentures (the “GC
Debentures”) of GenCanna. In February 2019, the Company converted
the GC Debentures, plus unpaid accrued interest of approximately
$229,000 through the conversion date, into common stock of GenCanna
equal to a 33.5% ownership interest in GenCanna on a fully diluted
basis. Concurrent with the conversion, Company’s CEO was appointed
to GenCanna’s board and the Company was granted certain rights,
including the rights of inspection, financial information, and
participation in future security offerings of GenCanna.
Since the
conversion date, this investment had been accounted for under the
equity method. However, as previously discussed in Note 1 –
Organization and Description of Business, GenCanna filed for
voluntary reorganization under Chapter 11 in February 2020 with the
U.S. Bankruptcy Court in the Eastern District of Kentucky. As a
result, the Company recorded a charge to net income of
approximately $30.23 million, classified under Loss on Equity
Investments on the statement of operations for the year ended
December 31, 2019, which reduced the carrying value of this
investment to zero.
CVP Worldwide LLC
In
August 2018, the Company invested $300,000, of a total contracted
cash investment of $500,000, and issued 378,259 shares of its
common stock, valued at approximately $915,000, in exchange for a
23% ownership in CVP Worldwide LLC (“CVP”). CVP has developed a
customer relationship management and marketing platform, branded
under the name Sprout, which is specifically designed for companies
in the cannabis industry.
The
Company shall assist in the ongoing development and design of
Sprout, and in marketing Sprout to companies within the cannabis
industry. The Company shall earn a percentage share of Sprout’s
revenues generated from sales (i) to the Company’s clients, and
(ii) by the Company to third parties. As of December 31, 2019, no
revenue was earned by the Company.
The
investment is accounted under the equity method. In 2018, the
Company recorded a charge to net income of approximately $43,000
based on its equity in CVP’s net loss during the period of the
Company’s ownership. Such amount reduced the carrying value of the
investment to approximately $1,172,000 at December 31, 2018. In
2019, the Company recorded a charge of approximately $105,000
representing the Company’s equity in CVP’s net loss during year,
further reducing the carrying value of the investment to
approximately $1,067,000 at December 31, 2019.
Iconic Ventures Inc.
In
December 2018, the Company purchased 2,500,000 shares of common
stock of Iconic Ventures Inc. (“Iconic”) for an aggregate cash
payment of $500,000. Iconic has developed DabTabs™, a unique
solution for cannabinoid vaporization via a convenient portable
tablet that provides precisely measured dosing and acts as a
storage system for full spectrum extracts, concentrates and
distillates.
The
Company’s investment equates to a current ownership interest in
Iconic of approximately 10%. The Company has no board
representation, nor does it have the ability to exert operational
or financial control over the entity. In accordance with ASC 321,
the Company elected the measurement alternative to value this
equity investment without a readily determinable fair value. Under
this alternative measurement election, the investment is recorded
at its cost minus impairment, if any, plus or minus changes
resulting from observable price changes in orderly transactions for
the identical or a similar investment in Iconic.
In 2019,
the Company wrote off the investment after an impairment review
that considered the viability of the entity in light of the current
economic climate. Accordingly, this
investment was carried at zero and $500,000 on December 31, 2019
and 2018, respectively.
Chooze Corp.
In January
2019, the entire principal and accrued interest balance of a note
receivable from Chooze Corp. of approximately $258,000 was
converted into a 2.7% equity interest in Chooze. In accordance with
ASC 321, the Company elected the measurement alternative to value
this equity investment without a readily determinable fair value.
Following the Company’s purchase, there has been no impairment to
this investment, nor any observable price changes to investments in
the entity. Accordingly, this investment was carried at
approximately $258,000 at December 31, 2019.
The
Company will continue to apply the alternative measurement guidance
until this investment does not qualify to be so measured. The
Company may subsequently elect to measure this investment at fair
value, and if so, shall measure all identical or similar
investments in Chooze at fair valu