Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
MariMed Inc., (the “Company”),
a Delaware corporation, is a professional management company in the emerging medical cannabis industry. The Company advises its
clients in securing cannabis licenses, and in turn, develops and manages, on behalf of its clients, state-of-the-art,
regulatory-compliant facilities for the cultivation, production, and dispensing of legal cannabis and cannabis-infused products.
Along with this operational oversight, the Company provides its clients with legal, accounting, human resources, and other corporate
and administrative services.
In addition, the Company licenses a custom
brand of cannabis-infused products, under the brand name Kalm Fusion™, which are precision-dosed and designed for specific
medical conditions and related symptoms. In October 2017, the Company expanded its product line with the acquisition of the Betty’s
Eddies™ brand of cannabis-infused fruit chews,
The
Company’s stock is quoted on the OTCQB market under the ticker symbol MRMD.
The
Company was originally incorporated in January 2011 under the name Worlds Online Inc., using the ticker symbol WORX. In early
2017, the Company name and ticker were changed to its current name and ticker. 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 subsidiary MariMed Advisors Inc., 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, (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 MariMed Advisors Inc.. This transaction, which was accounted for as
a purchase acquisition where the Company was both the legal and accounting acquirer, is further disclosed in Note 8 below.
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, 2017.
Certain
reclassifications have been made to prior periods’ data to conform to the current period presentation. These reclassifications
had no effect on reported income (losses) or cash flows.
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of MariMed Inc. and its subsidiaries, all of which
are majority-owned. 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.
Revenue
Recognition
The Company’s main sources of revenue
are comprised of: leasing contracts with its medical cannabis clients; oversight and corporate support of client operations;
consulting services to companies operating in the legal and medical cannabis industries; arrangements for the procurement
of cannabis materials and resources; and licensing revenues from the sale of its branded products.
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/services have been performed, the price is fixed or determinable, and collectability is reasonably assured.
Research
and Development Costs
Research
and development costs are charged to operations as incurred.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation, with depreciation recognized on a straight-line basis over the
shorter of the estimated useful life of the asset or the lease term, if applicable. When assets are retired or disposed, the cost
and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income. Repairs
and maintenance are charged to expense in the period incurred.
The
estimated useful lives of property and equipment are generally as follows: buildings and building improvements, seven to thirty-nine
years; tenant improvements, the remaining duration of the related lease; furniture and fixtures, seven years; machinery and equipment,
five to ten years. Land is not depreciated.
The
Company’s property and equipment are individually reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount of an asset exceeds
the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is
measured based on the excess of the asset’s carrying amount over its estimated fair value.
Impairment
analyses are based on management’s current plans, intended holding periods and available market information at the time
the analyses are prepared. If these criteria change, the Company’s evaluation of impairment losses may be different and
could have a material impact to the consolidated financial statements.
For
the three months ended March 31, 2018 and 2017, based on its impairment analyses, the Company did not have any impairment losses.
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. The fair value of option and warrant issuances are determined utilizing
the binomial options pricing model and employing the following inputs: life of instrument, exercise price, value of the underlying
security on issuance date, and 2-year volatility of underlying security.
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 three months ended March 31, 2018 and 2017.
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 March 31, 2018 and 2017, there were
10,005,697 and 10,475,000, respectively, of potentially dilutive securities in the form of options and warrants. Also as of March
31, 2018 and 2017, there were zero and 500,000 shares, respectively, of convertible preferred stock, and $550,000 and $3,125,000,
respectively, of convertible promissory notes, 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. 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
calculation. For that reason, the calculations of basic and fully diluted net income per share were identical for the three
months ended March 31, 2018 and 2017. These 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 would evaluate the perceived
merits of the proceedings or claims, and the perceived merits 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 such 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.
Risk
and Uncertainties
The
Company is subject to risks common to companies operating within the legal and medical marijuana industries, including, but not
limited to, federal laws, government regulations and jurisdictional laws.
Noncontrolling
Interests
Noncontrolling
interests represent third-party minority ownership of the Company’s consolidated subsidiaries. Net income attributable to
noncontrolling interests is shown in the consolidated statements of operations; and the value of net assets owned by noncontrolling
interests are presented as a component of equity within the balance sheets.
Off
Balance Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
Recent
Accounting Pronouncements
In
November 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-18,
Statement of Cash
Flows (Topic 230): Restricted Cash
, which enhances and clarifies the guidance on the classification and presentation of restricted
cash in the statement of cash flows. This ASU will be effective in 2019 and its impact is dependent upon the level of restricted
cash of the Company, which at this time is insignificant.
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842)
, which modifies accounting for lessees by requiring the recording of lease assets and liabilities
for operating leases and disclosing key information about leasing arrangements. This ASU will be effective in 2020 and the Company
is currently evaluating the impact of adoption, which will be determined by the Company’s lease portfolio at the time of
implementation.
In
2014 and subsequently in 2016, the FASB issued new standards on the recognition of revenue. While the new standards amend the
current standards, they are not expected to have a material impact on the amount and timing of revenue recognized in the Company’s
consolidated financial statements when the new standards are adopted in 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 – PROPERTY AND EQUIPMENT
Property
and equipment are shown net of accumulated depreciation and are primarily comprised of the following: land; buildings; building
and tenant improvements; furniture and fixtures; and machinery and equipment.
During
the three months ended March 31, 2018 and 2017, additions to property and equipment were approximately $1.3 million and
$1.8 million, respectively.
Depreciation
expense for the three months ended March 31, 2018 and 2017 was approximately $81,000 and $70,000, respectively. At March 31,
2018 and December 31, 2017, accumulated depreciation approximated $1,580,000 and $1,499,000, respectively.
NOTE
4 – DEBT
During the three months ended March 31, 2018,
the Company received additional capital of approximately $525,000 from the existing mortgage on its cannabis cultivation
and processing facility currently in development in Massachusetts.
During the three months ended March 31, 2017,
the Company raised $400,000 from the issuance of a promissory note with an interest rate of 10% and a term of 6 months. No promissory
notes were issued during the three months ended March 31, 2018.
During
the three months ended March 31, 2018, the Company repaid $500,000 of promissory notes, and converted $975,000 of promissory notes
into subscriptions on 1,346,153 shares of common stock as further disclosed in Note 5 below. No repayments
or conversions of debt occurred during the same period in 2017.
NOTE
5 – EQUITY
Preferred
Stock
In
January 2017, the Company increased the number of authorized shares of preferred stock from 5 million to 50 million shares.
During
the three months ended March 31, 2017, the Company issued subscriptions on 200,000 shares of Series A convertible preferred stock
at $1.00 per share. This preferred stock accrues an annual dividend of six percent until conversion.
The
Series A convertible preferred stock is convertible, along with any accrued dividends, into common stock at a twenty-five percent
discount to the selling price of the common stock in a qualified offering, as defined in the subscription agreement. In addition,
the Company shall have the ability to force the conversion of preferred stock at such time the Company has a market capitalization
in excess of $50 million for ten consecutive trading days. In such event, the conversion price shall be a 25% discount to the
average closing price of the Company’s common stock over the ten trading days prior to the Company’s notice of its
intent to convert.
During
the three months ended March 31, 2018, all 500,000 shares of subscribed Series A preferred stock were converted into 970,989 shares
of common stock at a conversion price of $0.55.
Common
Stock
In
January 2017, the Company increased the number of authorized shares of common stock from 100 million to 500 million shares.
During the three months ended March 31, 2018,
the Company sold 1,200,000 shares of common stock at a price of $0.50 per share, resulting in total proceeds of $600,000.
During the same period in 2017, the Company sold 6,467,778 shares of common stock at prices of $0.18 and $0.25 per share,
resulting in total proceeds of $1,300,000.
During
the three months ended March 31, 2018 and 2017, the Company issued 170,000 and 169,487 shares, respectively, of
common stock for services rendered by the former CFO of the Company. Based on the market value of the common stock on the dates
of the two issuances, the Company recorded non-cash losses of approximately $112,000 in 2018 and $18,000 in 2017.
During
the three months ended March 31, 2018, the Company issued 125,000 shares of common stock to settle an outstanding obligation.
The Company recorded a non-cash loss of approximately $91,000 based on the market value of the common stock on the issuance date.
Common
Stock Subscriptions
During
the three months ended March 31, 2018, the Company issued subscriptions on 1,319,432 shares of common stock, at prices of $0.65
and $0.95 per share, resulting in total proceeds of $875,000. No subscriptions on common stock were issued during the same period
in 2017.
In
February 2018, two promissory notes totaling $975,000 were converted into subscriptions on 1,346,153 shares of common stock. Based
on the market value of the common stock on the conversion dates, the Company recorded a non-cash loss on these conversions of
approximately $552,000.
During
the three months ended March 31, 2018, the Company issued subscriptions on 738,462 shares of common stock to settle an outstanding
obligation. The Company recorded a non-cash loss of approximately $459,000 based on the market value of the common stock on the
settlement date.
Al
l
of the subscriptions on common stock referred to above are reflected under the caption
Common Stock Subscriptions
within
the current liabilities section of the Company’s balance sheet.
Membership
Interests
During
the three months ended March 31, 2017, the Company issued 1,667 Class A membership units of Mari Holdings MD LLC, a majority-owned
subsidiary, for $150,000. These units represented 0.33% ownership of this subsidiary at March 31, 2017. No membership units
were issued during the three months ended March 31, 2018.
NOTE
6 – STOCK OPTIONS
During
the three months ended March 31, 2018, the Company granted options to purchase 1.45 million shares of common stock to the
Company’s board members at exercise prices ranging from $0.14 to $0.77, vesting over a six-month period, and expiring between
December 2020 and December 2022. The fair value of these options on grant date of approximately $458,000 shall be recorded
as non-cash compensation expense over the vesting periods, with approximately $366,000 incurred during the three months
ended March 31, 2018.
In
February 2018, the former CFO of the Company exercised options to purchase 300,000 shares of common stock at an exercise price
of $0.13. No options were exercised during the same period in 2017
Stock
options outstanding and exercisable as of March 31, 2018 were:
Exercise
Price
|
|
|
Shares
Under Option
|
|
|
Remaining
|
|
per
Share
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life
in Years
|
|
$
|
0.080
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
0.83
|
|
$
|
0.080
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
1.72
|
|
$
|
0.130
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
2.25
|
|
$
|
0.140
|
|
|
|
750,000
|
|
|
|
750,000
|
|
|
|
2.76
|
|
$
|
0.150
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1.50
|
|
$
|
0.250
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1.50
|
|
$
|
0.260
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
3.01
|
|
$
|
0.330
|
|
|
|
50,000
|
|
|
|
25,000
|
|
|
|
2.94
|
|
$
|
0.350
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1.50
|
|
$
|
0.450
|
|
|
|
2
50,000
|
|
|
|
-
|
|
|
|
3.51
|
|
$
|
0.550
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
2.50
|
|
$
|
0.630
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
3.76
|
|
$
|
0.770
|
|
|
|
300,000
|
|
|
|
-
|
|
|
|
4.76
|
|
|
|
|
|
|
5,650,000
|
|
|
|
4,975,000
|
|
|
|
|
|
NOTE
7 – WARRANTS
During
the three months ended March 31, 2018 and 2017, the Company issued warrants to purchase 200,000 and 100,000 shares
of common stock, at exercise prices of $1.15 and $0.50 per share, and expiring in February 2021 and March
2020, respectively. The Company recorded non-cash compensation expense of approximately $206,000 in 2018 and $19,000
in 2017 representing the estimated fair value of these instruments on the issuance dates.
During
the three months ended March 31, 2018, warrants to purchase 89,614 shares of common stock were exercised, at exercise prices of
$0.20 and $0.40. No warrants were exercised during the same period in 2017.
At
March 31, 2018 and 2017, warrants to purchase 4,355,697 and 1,225,000 shares of common stock were outstanding, respectively,
at exercise prices ranging between $0.10 and $1.15.
NOTE
8 – RELATED PARTY TRANSACTIONS
As disclosed in Note 1 above, in May 2014,
the Company acquired Sigal Consulting LLC from its ownership group which included the CEO and CFO of the Company (the “Sigal
Ownership Group”). The purchase price received by the Sigal Ownership Group was comprised of (i) 31,954,236 shares of common
stock valued at approximately $5,913.000, representing 50% of the Company’s outstanding shares on the closing date, (ii)
options to purchase three million shares of the Company’s common stock valued at approximately $570,000, and (iii) a 49%
ownership interest in the Company’s subsidiary MariMed Advisors, Inc. The excess of purchase price over the book value of
the acquired entity was recorded as goodwill, which was subsequently impaired in full and written down to zero.
In
June 2017, the Company acquired the remaining 49% interest of MariMed Advisors Inc. from the Sigal Ownership Group for an aggregate
75 million shares of common stock.
The
caption
Due from Related Parties
in the Company’s financial statements is primarily comprised of short term loans
to non-consolidated entities under common ownership.
The
caption
Due to Related Parties
reflects short term loans from related parties and includes advances received from officers
of the Company.
NOTE
9 –
COMMITMENTS AND CONTINGENCIES
An employment agreement with the former CEO
of the Company that provided this individual with salary, car allowances, stock options, life insurance, and other employee benefits
was terminated in 2017.
The
Company recorded an accrual of approximately $1,043,000 at March 31, 2018 and December 31, 2017 for any amounts that may be owed
under this agreement. However, the Company is reviewing this matter.
NOTE
10 – SEGMENT REPORTING
In
accordance with ASC 280, the following is information regarding the Company’s operating segments:
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Online portal operations
|
|
$
|
—
|
|
|
$
|
61
|
|
Cannabis operations
|
|
|
2,082,950
|
|
|
|
1,150,658
|
|
Consolidated
revenues
|
|
$
|
2,082,950
|
|
|
$
|
1,150,719
|
|
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
Online portal operations
|
|
$
|
—
|
|
|
$
|
—
|
|
Cannabis operations
|
|
|
80,791
|
|
|
|
69,827
|
|
Depreciation
and amortization
|
|
$
|
80,791
|
|
|
$
|
69,827
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
Online portal operations
|
|
$
|
(103
|
)
|
|
$
|
(138,023
|
)
|
Cannabis operations
|
|
|
(1,831,806
|
)
|
|
|
247,409
|
|
Net
income (loss)
|
|
$
|
(1,831,909
|
)
|
|
$
|
109,386
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Online portal operations
|
|
$
|
—
|
|
|
$
|
—
|
|
Cannabis operations
|
|
|
1,294,858
|
|
|
|
1,806,655
|
|
Combined
capital expenditures
|
|
$
|
1,294,858
|
|
|
$
|
1,806,655
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Online portal operations
|
|
$
|
1,295
|
|
|
$
|
4,576
|
|
Cannabis operations
|
|
|
33,936,779
|
|
|
|
10.845,183
|
|
Combined
assets
|
|
$
|
33,938,074
|
|
|
$
|
10,849,759
|
|
NOTE
11 – SUBSEQUENT EVENTS
The
following transactions occurred subsequent to March 31, 2018:
|
-
|
Warrants to purchase 75,000 shares of common stock were exercised at an exercise price of $0.20 per share. Warrants to purchase 100,000 shares of common stock were issued at exercise prices of $0.90 and $1.75 per share, expiring 5 years from issuance.
|
|
|
|
|
-
|
The Company issued 3,315,383 shares of common stock that were previously subscribed but not yet issued.
|
|
|
|
|
-
|
The Company sold 240,513 shares of common stock at prices
ranging from $0.65 to $0.90 per share, resulting in total proceeds of $198,000.
|