Notes
to Condensed Consolidated Financial Statements
(unaudited)
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
MariMed
Inc., formerly Worlds Online Inc. (the “Company”), is an industry leader in the emerging cannabis industry. The Company
advises its clients in securing cannabis licenses, and in turn, develops and manages state-of-the-art, regulatory-compliant facilities
for the cultivation, production, and dispensary of legal cannabis. In addition, the Company has created a brand of precision-dosed
cannabis infused products, under the brand name Kalm Fusion™, which are licensed and distributed nationally. The Company’s
stock is quoted on the OTCQB market under the ticker symbol MRMD (formerly WORX).
The
Company was originally incorporated in January 2011 in the state of Delaware. Since inception, the Company has operated an online
portal that offers multi-user virtual environments to users. This segment of the business has had insignificant operations since
early 2014.
In
May 2014, the Company, through its wholly-owned subsidiary MariMed Advisors Inc. (“MMA”), acquired Sigal Consulting
LLC in exchange for (i) an aggregate amount of the Company’s common stock equal to 50% of the Company’s outstanding
shares on the closing date of September 29, 2014, (ii) options to purchase three million shares of the Company’s common
stock, exercisable over five years with exercise prices ranging from $0.15 to $0.35, and (iii) a 49% ownership interest in MMA.
This
transaction was accounted for as a purchase acquisition where the Company was both the legal and accounting acquirer. Accordingly,
the Company recorded as goodwill the value of the common stock and options issued in excess of the Sigal assets acquired and liabilities
assumed. This goodwill was subsequently deemed impaired in full and written down to zero.
In
June 2017, the Company acquired the remaining 49% interest in MMA in exchange for 75 million shares of common stock.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”). In accordance with GAAP, these interim statements do not contain all of the disclosures
normally required in annual statements. In addition, the results of operations of interim periods are not necessarily indicative
of the results of operations to be expected for the full year. Accordingly, these interim financial statements should be read
in conjunction with the Company’s audited annual financial statements and accompanying notes for the year ended December
31, 2016.
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 purchased with an original maturity date of three months or less to be cash equivalents.
Revenue
Recognition
The
Company’s main sources of revenue are comprised of sales and licensing of branded products, operational consulting, leasing,
and advisory services. The Company recognizes revenue when all of the following criteria are met: evidence of an arrangement exists
such as a signed contract, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured.
This will usually be in the form of a receipt of customer acceptance and satisfaction with delivered product, or in the case of
development and service revenue, when services have been performed.
Deferred
revenue represents cash payments received before revenue is earned; the corresponding costs are also deferred until such revenue
is ultimately recognized.
Research
and Development Costs
Research
and development costs are charged to operations as incurred.
Fixed
Assets
Fixed
assets are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets.
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.
Impairment
of Long Lived Assets
The
Company evaluates the recoverability of its fixed assets and other assets in accordance with the Financial Accounting Standards
Board’s Accounting Standards Codification (“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.
Extinguishment
of Liabilities
The
Company accounts for extinguishment of liabilities in accordance with ASC 405-20,
Extinguishments of Liabilities.
When
the conditions for extinguishment are met, the liabilities are written down to zero and a gain or loss is recognized.
Stock-Based
Compensation
The
Company accounts for stock-based compensation using the fair value method as set forth in ASC 718,
Compensation—Stock
Compensation,
which requires a public entity to measure the cost of employee services received in exchange for an equity award
based on the fair value of the award on the grant date, with limited exceptions. Such value will be incurred as compensation expense
over the period an employee is required to provide service in exchange for the award, usually the vesting period. No compensation
cost is recognized for equity awards for which employees do not render the requisite service.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740,
Income Taxes
. Deferred income tax assets and liabilities
are determined based upon differences between the financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets
are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be
realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements
of operations in the period that includes the enactment date.
ASC
740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements
uncertain tax positions taken or expected to be taken on a tax return. The Company did not take any uncertain tax positions and
had no adjustments to unrecognized income tax liabilities or benefits for the nine months and year ended September 30, 2017 and
December 31, 2016, respectively.
Related
Party Transactions
The
Company follows ASC 850,
Related Party Disclosures
, for the identification of related parties and disclosure of related
party transactions.
In
accordance with ASC 850, the Company’s financial statements include disclosures of material related party transactions,
other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business, as well
as transactions that are eliminated in the preparation of financial statements.
Comprehensive
Income
The
Company reports comprehensive income and its components following guidance set forth by ASC 220,
Comprehensive Income
,
which establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial
statements. There were no items of comprehensive income applicable to the Company during the period covered in the financial statements.
Earnings
Per Share
Earnings
per common share is computed pursuant to ASC 260,
Earnings Per Share
. Basic earnings per share is computed by dividing
net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share
is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus the weighted
average number of potentially dilutive securities during the period.
As
of September 30, 2017 and 2016, there were 6,748,898 and 9,825,000 potentially dilutive securities in the form of
options and warrants. Such securities had an anti-dilutive effect on earnings per share, and in accordance with ASC 260,
were excluded from the diluted net income per share calculation. For that reason, the calculations of basic and fully diluted
net income per share were identical for the three and nine month periods ended September 30, 2017 and 2016. These options
and warrants may dilute earnings per share in the future.
Commitments
and Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which
will only be resolved when one or more future events occur or fail to occur. In accordance with ASC 450,
Contingencies
,
the Company assesses such contingent liabilities, and if the assessment indicates that it is probable and the amount of the liability
can be estimated, such estimated liability is accrued. Otherwise, contingent liabilities are disclosed unless considered remote.
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.
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.
Off
Balance Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
Reclassification
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).
Recent
Accounting Pronouncements
The
Company has reviewed all 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 - GOING CONCERN CONSIDERATION
The
accompanying financial statements have been prepared assuming the Company will continue as a going concern. While working capital
(current assets less current liabilities) was negative at September 30, 2017, for the nine months then ended, the Company generated
positive cash flow from operating activities, and revenues and income more than doubled from the same period a year ago.
During
the nine months ended September 30, 2017, the Company raised $9 million. The Company will need additional funding to fully implement
its business plan. An inability to obtain additional funding may have a material adverse effect on the Company and its operations.
The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE
4 – ACQUISITION
In
May 2014, the Company’s wholly-owned subsidiary, MariMed Advisors Inc. (“MMA”), acquired Sigal Consulting LLC
(“Sigal”), a company partially owned by the CEO and CFO of the Company. The purchase price, which was distributed
to the owners of Sigal, consisted of (i) 31,954,236 shares of the Company’s common stock, (ii) options to purchase three
million shares of the Company’s common stock at prices ranging from $0.15 - $0.35 per share and which vest over two years
and exercisable over five years, and (iii) a 49% interest in MMA.
The
value of the common stock issued was approximately $5,912,000, as determined by the fair value of the Company’s common stock
on the closing date. The fair value of the stock options was approximately $570,000, as measured by the use of an option pricing
model.
The
fair value of common stock issued and options granted for acquisition over the book value of Sigal was recorded as goodwill, which
was subsequently impaired in full.
In
June, the Company issued 75 million shares of common stock to purchase the remaining 49% ownership of MMA.
NOTE
5 – DEFERRED REVENUE
Deferred
revenue represented the conversion of a promissory note issued to a third party by the Company’s former parent, which was
assumed by the Company in 201l, for future products and services of the Company’s online portal business segment.
In
the third quarter of 2017, the Company wrote off the entire carrying amount of deferred revenue in accordance with an agreement
with the third party whereby the Company was released from all of its obligations to the third party and any actions or demands
related thereto.
NOTE
6 – FIXED ASSETS
Fixed
assets are comprised of
land and properties that have been
acquired, built out for commercial use within the legal and medical cannabis industry, and then leased to third parties.
These amounts are shown net of accumulated depreciation.
During
the nine months ended September 30, 2017, fixed asset purchases were $11.5 million compared to $3.3 million during the same period
in 2016. These purchases included the acquisition of properties in Hagerstown, MD and Middleborough, MA, and the buildout of facilities
in Lewes, DE, Clark County, NV, and Hagerstown, MD.
Depreciation
and amortization for the nine months ended September 30, 2017 and 2016 was approximately $264,000 and $166,000, respectively.
NOTE
7 – WARRANTS AND STOCK OPTIONS
During
the nine months ended September 30, 2017, the Company issued warrants to purchase 100,000 shares of preferred stock and 873,898
shares of common stock; and options to purchase 200,000 shares of common stock. The Company recorded non-cash equity compensation
of approximately $285,000 representing the estimated fair value of these instruments on the grant date, calculated using a binomial
pricing model.
During
the three months ended September 30, 2017, options to purchase 4.8 million shares of common stock were exercised, at exercise
prices ranging from $0.010 to $0.025. The issuance of shares associated with these exercises occurred after the quarter end,
and accordingly the stock is reflected as
Common Stock Subscribed But Not Yet Issued
within the September 30, 2017 balance
sheet.
Stock
options outstanding and exercisable as of September 30, 2017 were:
Exercise
Price
|
|
|
Shares
Under Option
|
|
|
Remaining
|
|
per
Share
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life
in Years
|
|
$
|
0.025
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
0.22
|
|
$
|
0.025
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
0.25
|
|
$
|
0.080
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
2.22
|
|
$
|
0.080
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
1.33
|
|
$
|
0.130
|
|
|
|
600,000
|
|
|
|
600,000
|
|
|
|
2.75
|
|
$
|
0.150
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1.99
|
|
$
|
0.250
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1.99
|
|
$
|
0.350
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1.99
|
|
$
|
0.550
|
|
|
|
200,000
|
|
|
|
10,000
|
|
|
|
2.90
|
|
|
|
|
|
|
4,650,000
|
|
|
|
4,460,000
|
|
|
|
|
|
NOTE
8 – RELATED PARTY TRANSACTIONS
In
May 2014, the Company acquired Sigal Consulting LLC, a company partially owned by the CEO and CFO of the Company. The details
of this transaction are further disclosed in Note 4 above.
On
June 30, 2017, the Company acquired the remaining 49% interest in MariMed Advisors Inc. from its ownership group, which included
the CEO and CFO of the Company, for an aggregate 75 million shares of common stock. This common stock is restricted for a
period of 12 months following the transaction date.
The
caption
Due from Related Parties
in the Company’s financial statements is comprised of cash payments to subsidiaries
to pay for operating expenses.
The
caption
Due to Related Parties
reflects cash received from related parties to pay for operating expenses and includes advances
received from officers of the Company.
NOTE
9 –
COMMITMENTS AND CONTINGENCIES
An
employment agreement with the former CEO of the Company, which expired on September 1, 2017, provided this individual with salary,
car allowances, bonuses based on the Company reaching certain milestones, life insurance, stock options and a death benefit.
The
balance owed under this agreement at September 30, 2017 and December 31, 2016 was approximately $1,011,000 and $840,000, respectively.
These amounts are reflected in the Company financial statements under the caption
Accounts Payable and Accrued Expenses
.
NOTE
10 - NON-CONTROLLING INTERESTS
Non-controlling
Interests
shown in the Company’s financial statements represent the minority ownership interests of consolidated
subsidiaries that are not wholly-owned. Net income attributable to non-controlling interests was approximately $178,000
and $183,000 for the nine months ended September 30, 2017 and 2016, respectively. The accumulated deficit attributable to non-controlling
interests was approximately $735,000 and $557,000 at September 30, 2017 and December 31, 2016, respectively.
NOTE
11 – SEGMENTS
In
accordance with ASC 280, the following is information regarding the Company’s operating segments:
|
|
Nine
Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Online
portal operations
|
|
$
|
289
|
|
|
$
|
510
|
|
Cannabis
operations
|
|
|
4,487,184
|
|
|
|
2,134,935
|
|
Consolidated
revenues
|
|
$
|
4,487,473
|
|
|
$
|
2,135,445
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
Online
portal operations
|
|
$
|
—
|
|
|
$
|
—
|
|
Cannabis
operations
|
|
|
263,624
|
|
|
|
166,108
|
|
Depreciation
and amortization
|
|
$
|
263,624
|
|
|
$
|
166,108
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
Online
portal operations
|
|
$
|
(31,703
|
)
|
|
$
|
(355,058
|
)
|
Cannabis
operations
|
|
|
331,864
|
|
|
|
327,637
|
|
Net
income (loss)
|
|
$
|
300,161
|
|
|
$
|
(27,421
|
)
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
Online
portal operations
|
|
$
|
—
|
|
|
$
|
—
|
|
Cannabis
operations
|
|
|
11,502,688
|
|
|
|
3,346,355
|
|
Combined
capital expenditures
|
|
$
|
11,502,688
|
|
|
$
|
3,346,355
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Online
portal operations
|
|
$
|
1,476
|
|
|
$
|
9,137
|
|
Cannabis
operations
|
|
|
21,370,942
|
|
|
|
7,687,828
|
|
Combined
assets
|
|
$
|
21,372,418
|
|
|
$
|
7,696,965
|
|
NOTE
12 – MATERIAL TRANSACTIONS
In
June 2015, the Company entered into a long-term tenancy agreement with First State Compassion Center, Inc. (“FSCC”)
for the lease of its state-of-the-art medical cannabis facility in Delaware. FSCC is one of the companies to be awarded
a medical marijuana license in the state.
In
April 2015, the Company entered into a long-term agreement with two companies that have been awarded medical marijuana licenses
in the state of Illinois to lease two of the Company’s state-of-the-art medical cannabis facilities in the state.
In
August 2017, the Company issued 4,385,823 shares of common stock to retire promissory notes with principal balances of $2,050,000
plus accrued interest. On the transaction date, the fair value of the common stock was $0.63 per share, resulting in the company
recording a non-cash loss on debt conversion of approximately $451,000.
These
former noteholders also received, in September 2017, warrants to purchase 863,898 shares of common stock. The fair value of these
warrants on the grant date was approximately $257,000, which made up most of the non-cash equity compensation
of approximately $285,000 recorded by the Company in the third quarter, as further discussed in Note 7 above.
In
September 2017, the Company entered into a letter of intent with Tikun Olam to expand the Company’s licensing of Tikun Olam’s
unique cannabis strains into four additional legal cannabis states.
NOTE
13 - SUBSEQUENT EVENTS
In
October 2017, the Company received a certificate of occupancy for its recently completed facility in Hagerstown, MD, which is
leased to a third party that has been awarded a medical marijuana license in the state.
In
November 2017, the Company purchased a 137,500 square foot industrial building in New Bedford, MA, a portion
of which is tenant-occupied, and a portion of which will be renovated into a state-of-the-art medical cannabis facility
to be leased to a cannabis licensee in the state.
In
November 2017, the Company entered into an exclusive licensing agreement for the production and distribution of its branded cannabis
products in the state of Nevada, which is expected to commence in the fourth quarter of 2017.
During the period October 1
through November 14, 2017, the Company issued 450,000 shares of its common stock.