UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2018March 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 | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) |
10 Oceana Way
Norwood, MA 02062
(Address of Principal Executive Offices)
617-795-5140
(Registrant’s Telephone Number, Including Area Code)
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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check One):
| Large Accelerated filer [ ] | Accelerated filer |
| Non-accelerated filer [ ] | Smaller reporting company [X] |
| Emerging growth company | [X] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Securities registered pursuant to Section 12(b) of the Act: None.
| Title of each class | Ticker symbol(s) | Name of each exchange on which registered | ||
| Not Applicable. | Not Applicable. | Not Applicable. |
As of November 14, 2018, 208,398,893May 10, 2019, 212,636,398 shares of the Issuer’s Common Stock were outstanding.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
MariMed Inc.
Condensed Consolidated Financial Statements
Three and Nine Months Ended September 30, 2018 and 2017
Table of Contents
MariMed Inc.
Condensed Consolidated Balance Sheets
| September 30, 2018 | December 31, 2017 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 6,027,044 | $ | 1,290,231 | ||||
| Accounts receivable, net | 4,019,737 | 1,453,484 | ||||||
| Deferred rents receivable | 1,707,697 | 610,789 | ||||||
| Due from third parties | 3,122,654 | 1,196,918 | ||||||
| Due from related parties | 134,781 | 134,781 | ||||||
| Notereceivable, current portion | 49,886 | 45,444 | ||||||
| Other current assets | 457,703 | 357,019 | ||||||
| Total current assets | 15,519,502 | 5,088,666 | ||||||
| Property and equipment, net | 32,768,839 | 25,954,931 | ||||||
| Notesreceivable, less current portion | 7,595,302 | 578,831 | ||||||
| Other assets | 1,249,856 | 579,587 | ||||||
| Total assets | $ | 57,133,499 | $ | 32,202,015 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,632,822 | $ | 2,831,658 | ||||
| Accrued expenses | 1,460,120 | 1,405,336 | ||||||
| Due to related parties | 204,996 | 400,996 | ||||||
| Mortgages payable, current portion | 121,199 | 118,556 | ||||||
| Common stock subscriptions | 3,860,000 | - | ||||||
| Notes payable | 4,615,804 | 10,665,899 | ||||||
| Total current liabilities | 12,894,941 | 15,422,445 | ||||||
| Mortgages payable, less current portion | 7,443,162 | 5,532,397 | ||||||
| Other liabilities | 293,768 | 240,013 | ||||||
| Total liabilities | 20,631,871 | 21,194,855 | ||||||
| Stockholders’ equity: | ||||||||
| Series A convertible preferred stock, $0.001 par value; 50,000,000 shares authorized at September 30, 2018 and December 31, 2017; no shares issued or outstanding at September 30, 2018 or December 31, 2017 | - | - | ||||||
| Series A preferred stock subscribed but not issued; zero and 500,000 shares at September 30, 2018 and December 31, 2017, respectively | - | 500 | ||||||
| Common stock, $0.001 par value; 500,000,000 shares authorized at September 30, 2018 and December 31, 2017; 203,466,907 and 176,940,331 shares issued at September 30, 2018 and December 31, 2017, respectively; 203,121,380 and 176,850,331 shares outstanding at September 30, 2018 and December 31, 2017, respectively | 203,467 | 176,940 | ||||||
| Common stock subscribed but not issued; zero and 1,000,000 shares at September 30, 2018 and December 31, 2017 | - | 370,000 | ||||||
| Subscriptions receivable | - | (25,000 | ) | |||||
| Common stock warrants | 16,413,608 | 2,176,379 | ||||||
| Treasury stock, at cost; 345,528 and 90,000 shares at September 30, 2018 and December 31, 2017, respectively | (643,000 | ) | (45,000 | ) | ||||
| Additional paid-in capital | 51,052,902 | 20,149,591 | ||||||
| Accumulated deficit | (30,417,269 | ) | (11,971,740 | ) | ||||
| Noncontrolling interests | (108,080 | ) | 175,490 | |||||
| Total stockholders’ equity | 36,501,628 | 11,007,160 | ||||||
| Total liabilities and stockholders’ equity | $ | 57,133,499 | $ | 32,202,015 | ||||
| March 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 4,215,835 | $ | 4,104,315 | ||||
| Accounts receivable, net | 7,134,020 | 5,376,966 | ||||||
| Deferred rents receivable | 2,098,677 | 2,096,384 | ||||||
| Due from third parties | 2,296,163 | 3,860,377 | ||||||
| Due from related parties | - | - | ||||||
| Notes receivable, current portion | 64,392 | 51,462 | ||||||
| Seed inventory | 3,250,000 | - | ||||||
| Other current assets | 170,957 | 219,012 | ||||||
| Total current assets | 19,230,044 | 15,708,516 | ||||||
| Property and equipment, net | 35,422,135 | 34,099,864 | ||||||
| Intangibles, net | 123,333 | 185,000 | ||||||
| Investments | 34,117,571 | 1,672,163 | ||||||
| Notes receivable, less current portion | 2,172,200 | 1,092,376 | ||||||
| Debentures receivable | - | 30,000,000 | ||||||
| Operating lease right-of-use assets | 6,171,473 | - | ||||||
| Finance lease right-of-use assets | 31,802 | - | ||||||
| Due from related parties | 120,821 | 119,781 | ||||||
| Other assets | 235,905 | 82,924 | ||||||
| Total assets | $ | 97,625,284 | $ | 82,960,624 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,940,468 | $ | 3,915,430 | ||||
| Accrued expenses | 1,776,660 | 1,588,368 | ||||||
| Deferred rents payable | - | 105,901 | ||||||
| Notes payable | 10,380,000 | 3,877,701 | ||||||
| Mortgages payable, current portion | 217,479 | 188,231 | ||||||
| Operating lease liabilities, current portion | 487,009 | - | ||||||
| Finance lease liabilities, current portion | 12,661 | - | ||||||
| Due to related parties | 220,271 | 276,311 | ||||||
| Total current liabilities | 15,034,548 | 9,951,942 | ||||||
| Mortgages payable, less current portion | 7,289,871 | 7,348,581 | ||||||
| Debentures payable | 3,794,532 | 3,557,440 | ||||||
| Operating lease liabilities, less current portion | 5,794,580 | - | ||||||
| Finance lease liabilities, less current portion | 19,820 | - | ||||||
| Other liabilities | 169,200 | 338,200 | ||||||
| Total liabilities | 32,102,551 | 21,196,163 | ||||||
| Stockholders’ equity: | ||||||||
| Series A convertible preferred stock, $0.001 par value; 50,000,000 shares authorized at March 31, 2019 and December 31, 2018; no shares issued or outstanding at March 31, 2019 and December 31, 2018 | - | - | ||||||
| Series A preferred stock subscribed but not issued; no shares outstanding at March 31, 2019 and December 31, 2018 | - | - | ||||||
| Common stock, $0.001 par value; 500,000,000 shares authorized at March 31, 2019 and December 31, 2018; 212,425,383 and 211,013,043 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively | 212,425 | 211,013 | ||||||
| Common stock subscribed but not issued; zero and 97,136 shares at March 31, 2019 and December 31, 2018 | - | 169,123 | ||||||
| Additional paid-in capital | 91,200,774 | 87,180,165 | ||||||
| Accumulated deficit | (25,599,019 | ) | (25,575,808 | ) | ||||
| Noncontrolling interests | (291,447 | ) | (220,032 | ) | ||||
| Total stockholders’ equity | 65,522,733 | 61,764,461 | ||||||
| Total liabilities and stockholders’ equity | $ | 97,625,284 | $ | 82,960,624 | ||||
See accompanying notes to condensed consolidated financial statements.
MariMed Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenues | $ | 3,391,582 | $ | 1,715,697 | $ | 8,411,858 | $ | 4,487,473 | ||||||||
| Cost of revenues, including depreciation | 1,521,783 | 548,181 | 3,324,009 | 1,488,542 | ||||||||||||
| Gross profit | 1,869,799 | 1,167,516 | 5,087,849 | 2,998,931 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Personnel | 352,257 | 269,795 | 821,815 | 574,481 | ||||||||||||
| Marketing and promotion | 37,202 | 29,286 | 166,906 | 144,020 | ||||||||||||
| General and administrative | 619,419 | 581,391 | 2,140,816 | 1,163,718 | ||||||||||||
| Total operating expenses | 1,008,878 | 880,472 | 3,129,535 | 1,882,218 | ||||||||||||
| Operating income | 860,921 | 287,044 | 1,958,314 | 1,116,713 | ||||||||||||
| Non-operating expenses: | ||||||||||||||||
| Interest expense, net | 454,847 | 89,934 | 1,018,460 | 267,840 | ||||||||||||
| Amortization of stock option and warrant issuances | 8,109,661 | 274,224 | 14,973,270 | 293,519 | ||||||||||||
| Loss on debt settlements | 2,407,671 | 463,855 | 4,184,631 | 482,133 | ||||||||||||
| Other | - | (226,940 | ) | 3,600 | (226,940 | ) | ||||||||||
| Total non-operating expenses | 10,972,179 | 601,073 | 20,179,961 | 816,552 | ||||||||||||
| Net income (loss) | (10,111,258 | ) | (314,029 | ) | (18,221,647 | ) | 300,161 | |||||||||
| Net income (loss) attributable to noncontrolling interests | 91,362 | 78,421 | 223,882 | 177,852 | ||||||||||||
| Net income (loss) attributable to MariMed Inc. | $ | (10,202,620 | ) | $ | (392,450 | ) | $ | (18,445,529 | ) | $ | 122,309 | |||||
| Net income (loss) per share | $ | (0.052 | ) | $ | (0.002 | ) | $ | (0.099 | ) | $ | 0.001 | |||||
| Weighted average common shares outstanding | 196,415,503 | 163,737,564 | 186,952,362 | 97,982,499 | ||||||||||||
| Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenues | $ | 3,515,815 | $ | 2,082,950 | ||||
| Cost of revenues | 1,254,790 | 888,869 | ||||||
| Gross profit | 2,261,025 | 1,194,081 | ||||||
| Operating expenses: | ||||||||
| Personnel | 673,375 | 184,671 | ||||||
| Marketing and promotion | 118,899 | 51,761 | ||||||
| General and administrative | 1,691,032 | 1,279,291 | ||||||
| Total operating expenses | 2,483,306 | 1,515,722 | ||||||
| Operating income | (222,281 | ) | (321,641 | ) | ||||
| Non-operating income (expenses): | ||||||||
| Interest expense | (1,940,547 | ) | (316,261 | ) | ||||
| Interest income | 282,409 | 19,834 | ||||||
| Equity in earnings of investments | 1,958,407 | - | ||||||
| Loss on debt settlements | - | (1,213,841 | ) | |||||
| Total non-operating income (expenses) | 300,269 | (1,510,268 | ) | |||||
| Net income (loss) | 77,988 | (1,831,909 | ) | |||||
| Net income (loss) attributable to noncontrolling interests | 101,199 | 63,233 | ||||||
| Net income (loss) attributable to MariMed Inc. | $ | (23,211 | ) | $ | (1,895,142 | ) | ||
| Net income (loss) per share | $ | (0.000 | ) | $ | (0.011 | ) | ||
| Weighted average common shares outstanding | 212,034,324 | 178,914,829 | ||||||
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
Series A Convertible Preferred Stock Subscribed But Not Issued | Common Stock | Common Stock Subscribed But Not Issued | Additional Paid-In | Accumulated | Non-Controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Par Value | Shares | Amount | Capital | Deficit | Interests | Equity | |||||||||||||||||||||||||||||||
| Balances at December 31, 2017 | 500,000 | $ | 500 | 176,850,331 | $ | 176,850 | 1,000,000 | $ | 370,000 | $ | 22,256,060 | $ | (11,971,740 | ) | $ | 175,490 | $ | 11,007,160 | ||||||||||||||||||||||
| Sales of common stock | 1,200,000 | 1,200 | 598,800 | 600,000 | ||||||||||||||||||||||||||||||||||||
| Sales of subscribed common stock | 1,319,432 | 875,000 | - | 875,000 | ||||||||||||||||||||||||||||||||||||
| Conversion of Series A preferred stock | (500,000 | ) | (500 | ) | 970,988 | 971 | 33,573 | 34,044 | ||||||||||||||||||||||||||||||||
| Settlement of obligations | 295,000 | 295 | 738,462 | 834,462 | 329,105 | 1,163,862 | ||||||||||||||||||||||||||||||||||
| Option grants | 382,654 | 382,654 | ||||||||||||||||||||||||||||||||||||||
| Exercise of options | 300,000 | 300 | 38,700 | 39,000 | ||||||||||||||||||||||||||||||||||||
| Warrant issuances | 206,347 | 206,347 | ||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | 89,614 | 90 | 30,756 | 30,846 | ||||||||||||||||||||||||||||||||||||
| Retirement of promissory notes | 1,346,153 | 1,526,538 | 1,526,538 | |||||||||||||||||||||||||||||||||||||
| Distributions | (64,275 | ) | (64,275 | ) | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | (1,895,142 | ) | 63,233 | (1,831,909 | ) | |||||||||||||||||||||||||||||||||||
| Balances at March 31, 2018 | - | $ | - | 179,705,933 | $ | 179,706 | 4,404,047 | $ | 3,606,000 | $ | 23,875,995 | $ | (13,866,882 | ) | $ | 174,448 | $ | 13,969,267 | ||||||||||||||||||||||
Series A Convertible Preferred Stock Subscribed But Not Issued | Common Stock | Common Stock Subscribed But Not Issued | Additional Paid-In | Accumulated | Non-Controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Par Value | Shares | Amount | Capital | Deficit | Interests | Equity | |||||||||||||||||||||||||||||||
| Balances at December 31, 2018 | - | $ | - | 211,013,043 | $ | 211,013 | 97,136 | $ | 169,123 | $ | 87,180,165 | $ | (25,575,808 | ) | $ | (220,032 | ) | $ | 61,764,461 | |||||||||||||||||||||
| Sales of common stock | 799,995 | 800 | 2,599,200 | 2,600,000 | ||||||||||||||||||||||||||||||||||||
| Issuance of subscribed shares | 97,136 | 97 | (97,136 | ) | (169,123 | ) | 169,026 | - | ||||||||||||||||||||||||||||||||
| Exercise of options | 260,015 | 260 | 12,740 | 13,000 | ||||||||||||||||||||||||||||||||||||
| Exercise of warrants | 22,000 | 22 | 15,778 | 15,800 | ||||||||||||||||||||||||||||||||||||
| Amortization of option and warrant issuances | 527,163 | |||||||||||||||||||||||||||||||||||||||
| Conversion of debentures payable | 233,194 | 233 | 696,702 | 696,935 | ||||||||||||||||||||||||||||||||||||
| Distributions | (172,614 | ) | (172,614 | ) | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | (23,211 | ) | 101,199 | 77,988 | ||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2019 | - | $ | - | 212,425,383 | $ | 212,425 | - | $ | - | $ | 91,200,774 | $ | (25,599,019 | ) | $ | (291,447 | ) | $ | 65,522,733 | |||||||||||||||||||||
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 condensed consolidated financial statements.
MariMed Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) attributable to MariMed Inc. | $ | (18,445,529 | ) | $ | 122,309 | |||
| Net income (loss) attributable to noncontrolling interests | 223,882 | 177,852 | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation | 445,504 | 263,624 | ||||||
| Amortization of stock option and warrant issuances | 15,026,148 | 293,519 | ||||||
| Common stock issued for services | 3,640,621 | 38,965 | ||||||
| Loss on preferred stock conversions | 34,044 | - | ||||||
| Loss on debt settlements | 3,210,472 | 482,133 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | (2,566,254 | ) | (793,081 | ) | ||||
| Deferred rents receivable | (1,096,908 | ) | (71,887 | ) | ||||
| Due from third parties | (1,925,735 | ) | (467,583 | ) | ||||
| Due from related parties | - | 52,727 | ||||||
| Other current assets | (100,684 | ) | (66,422 | ) | ||||
| Other assets | 29,731 | (169,990 | ) | |||||
| Accounts payable | (198,836 | ) | 3,069,948 | |||||
| Accrued expenses | 129,689 | (22,495 | ) | |||||
| Due to related parties | (196,000 | ) | (53,342 | ) | ||||
| Deferred revenue | - | (226,950 | ) | |||||
| Other liabilities | 53,755 | 500 | ||||||
| Net cash provided by (used in) operating activities | (1,736,100 | ) | 2,629,827 | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (7,259,413 | ) | (11,502,688 | ) | ||||
| Investment in debentures and notes | (7,050,000 | ) | - | |||||
| Investment in Sprout | (100,000 | ) | - | |||||
| Interest on notes receivable | 29,087 | 29,625 | ||||||
| Net cash used in investing activities | (14,380,326 | ) | (11,473,063 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from subscribed preferred stock | - | 200,000 | ||||||
| Issuance of common stock | 16,896,000 | 5,150,000 | ||||||
| Issuance (repayments) of promissory notes, net | 2,300,000 | 3,650,000 | ||||||
| Proceeds from (payments of) mortgages payable, net | 1,913,408 | (80,622 | ) | |||||
| Exercise of stock options | 39,000 | 7,500 | ||||||
| Exercise of warrants | 212,284 | - | ||||||
| Distributions | (507,453 | ) | - | |||||
| Net cash provided by financing activities | 20,853,239 | 8,926,878 | ||||||
| Net change to cash and cash equivalents | 4,736,813 | 83,642 | ||||||
| Cash and cash equivalents at beginning of period | 1,290,231 | 569,356 | ||||||
| Cash and cash equivalents at end of period | $ | 6,027,044 | $ | 652,998 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 931,195 | $ | 418,738 | ||||
| Cash paid for taxes | $ | 12,021 | $ | 8,138 | ||||
| Non-cash activities: | ||||||||
| Equity issued to settle debt | $ | 8,425,000 | $ | 2,050,000 | ||||
| Equity issued for acquisitions | $ | 600,000 | $ | 370,000 | ||||
| Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) attributable to MariMed Inc. | $ | (23,211 | ) | $ | (1,895,142 | ) | ||
| Net income (loss) attributable to noncontrolling interests | 101,199 | 63,233 | ||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation | 218,196 | 80,791 | ||||||
| Amortization of intangibles | 61,667 | - | ||||||
| Amortization of warrants | 760,292 | - | ||||||
| Amortization of beneficial conversion feature | 756,959 | - | ||||||
| Amortization of original issue discount | 12,337 | - | ||||||
| Amortization of stock option and warrant issuances | 527,163 | 572,807 | ||||||
| Loss on promissory note extinguishments | - | 1,213,841 | ||||||
| Equity in earnings of investments | (1,958,407 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (1,757,054 | ) | (668,561 | ) | ||||
| Deferred rents receivable | (2,293 | ) | (114,038 | ) | ||||
| Due from third parties | 708,302 | (647,131 | ) | |||||
| Seed inventory | (3,250,000 | ) | - | |||||
| Other current assets | 48,055 | (19,440 | ) | |||||
| Other assets | (152,981 | ) | 36,142 | |||||
| Accounts payable | (1,974,962 | ) | (110,555 | ) | ||||
| Accrued expenses | (134,287 | ) | 616,213 | |||||
| Deferred rents payable | (105,901 | ) | - | |||||
| Operating lease payments | 110,116 | - | ||||||
| Finance lease interest payments | (420 | ) | - | |||||
| Other liabilities | (169,000 | ) | - | |||||
| Net cash used in operating activities | (6,224,230 | ) | (871,840 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (1,538,414 | ) | (1,294,858 | ) | ||||
| Investment in convertible debentures | - | - | ||||||
| Investment in notes receivable | (509,421 | ) | - | |||||
| Interest on notes receivable | 14,894 | 10,398 | ||||||
| Due from related parties | (1,040 | ) | ||||||
| Net cash used in investing activities | (2,033,981 | ) | (1,284,460 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from subscribed common stock | - | 875,000 | ||||||
| Issuance of common stock | 2,600,000 | 600,000 | ||||||
| Issuance of interest in subsidiary | ||||||||
| Issuance of promissory notes | 6,000,000 | - | ||||||
| Payments on promissory notes | - | (500,000 | ) | |||||
| Proceeds from mortgages | - | 524,593 | ||||||
| Payments on mortgages | (29,461 | ) | (29,502 | ) | ||||
| Exercise of stock options | 13,000 | 39,000 | ||||||
| Exercise of warrants | 15,800 | 30,846 | ||||||
| Due to related parties | (56,040 | ) | (200,000 | ) | ||||
| Finance lease principal payments | (954 | ) | - | |||||
| Distributions | (172,614 | ) | (64,275 | ) | ||||
| Net cash provided by financing activities | 8,369,731 | 1,275,662 | ||||||
| Net change to cash and cash equivalents | 111,520 | (880,638 | ) | |||||
| Cash and cash equivalents at beginning of period | 4,104,315 | 1,290,231 | ||||||
| Cash and cash equivalents at end of period | $ | 4,215,835 | $ | 409,593 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 316,616 | $ | 291,912 | ||||
| Cash paid for taxes | $ | 10,011 | $ | 12,596 | ||||
| Non-cash activities: | ||||||||
| Conversion of debentures receivable | $ | 30,000,000 | $ | - | ||||
| Operating lease right-of-use assets and liabilities | $ | 6,334,392 | $ | - | ||||
| Finance lease right-of-use assets and liabilities | $ | 33,855 | $ | - | ||||
| Conversion of advances to notes receivable | $ | 855,913 | $ | - | ||||
| Conversion of debentures payable | $ | 696,937 | $ | - | ||||
| Conversion of notes receivable to investment | $ | 257,687 | $ | - | ||||
| Issuance of common stock associated with subscriptions | $ | 169,123 | $ | - | ||||
Conversion of promissory notes | $ | - | $ | 5,526,536 | ||||
See accompanying notes to condensed consolidated financial statements.
MariMed Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
MariMed Inc. (the “Company”), a Delaware corporation, is a multifaceted company in the emerging legal cannabis and hemp industries. During 2018, the Company made a strategic decision to transition from a professional management and advisory company that provides cannabis licensing, operational consulting and real estate services, to a direct owner of cannabis licenses and operator of seed-to-sale operations.
The Company develops and manages state-of-the-art, regulatory-compliant facilities for the cultivation, production, and dispensing of legal cannabis and cannabis-infused products. Such facilities, located in multiple states, are leased to the Company’s clients in the emerging cannabis industry. Along with operational oversight, the Company provides its clients with legal, accounting, human resources, business development, and other corporate and administrative services.
The Company also provides professional consultative services in all aspects of cannabis licensing procurement.
To date, the Company has secured, on behalf of its clients, 11 cannabis licenses across five states—two in Delaware, two in Illinois, one in Nevada, three in Maryland and three in Massachusetts. Accordingly, the Company has developed overThe Company’s seed-to-sale cannabis facilities, currently in excess of 300,000 square feet, are leased to its clients in each of seed-to-sale cannabisthese states. Along with operational oversight of its facilities, across these five states.the Company provides its clients with legal, accounting, human resources, business development, and other corporate and administrative services.
In addition,Additionally, the Company licenses its own brands of precision-dosed, cannabis-infused products to treat specific medical conditions or to achieve a certain result.effect. These products are licensed under the brand names Kalm Fusion™ and, Nature’s Heritage™, both of which were developed by the Company, and Betty’s Eddies™, acquired in October 2017.. The Company also has exclusive sublicensing rights in certain states to distribute Lucid Mood™ vaporizer pens, developed by Lucid Mood™, as well asVitiprints™ printable dissolvable discs, DabTabs™ vaporization tablets infused with cannabis concentrates, and the clinically-testedclinically tested medicinal cannabis strains developed in Israel by Tikun Olam™.
The Company’s stock is quoted on the OTCQB market under the ticker symbol MRMD.
The Company was 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 had operated an online portal that offers multi-user virtual environments to users. This segment of the business has had insignificant operations since early 2014.
The Company has entered into several transactions to develop its business and carry out its aforementioned strategic transition decision which are summarized below and disclosed in further detail inNote 3 –Acquisitions and inNote 4 –Investments.
In May 2014, the Company, through its subsidiary MariMed Advisors Inc., acquired Sigal Consulting LLC, a company operating in the medical cannabis industry. The purchase price consisted of Company common stock, options to purchase additional Company common stock, and a minority interest in MariMed Advisors Inc. This transaction further disclosed in Note 3, was accounted for as a purchase acquisition where the Company was both the legal and accounting acquirer. In June 2017, the minority interest in MariMed Advisors Inc. was merged into the Company.
In MayOctober 2017, the Company acquired the intellectual property, formulations, recipes, proprietary equipment, knowhow, and other certain assets of Betty’s Eddies™, a brand of cannabis-infused fruit chews
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. This acquisition is further disclosed in Note 3.
In July 2018, the Company contracted to acquire AgriMed Industries of PA LLC (“AgriMed”), an entity that holds a license for the cultivation of cannabis into medical marijuana products in the state of Pennsylvania, as further disclosedPennsylvania. In February 2019, the Company filed a complaint against AgriMed for specific performance. The parties are currently in Note 3.discussions to resolve this matter.
In August 2018, the Company exchanged cash and stock to acquire a 23% ownership interest in an entity that has developed a customer relationship management and marketing platform, branded under the name Sprout, which is specifically designed for companies in the cannabis industry. Also during this period, the Company obtained the exclusive worldwide license of the Vitiprints patented technology for printable dissolvable cannabis-infused discs.
In October 2018, the Company entered into a purchase agreement to acquire its two cannabis-licensed clients, KPG of Anna LLC and KPG of Harrisburg LLC, currently operating medical marijuana dispensaries in the state of Illinois. The executionCompany has not yet received legislative approval – required for all ownership changes of this agreement occurred subsequent tocannabis licensees – and therefore these entities were not consolidated in the quarter endCompany’s financial statements as further disclosedof March 31, 2019. The Company anticipates approval will be obtained, and the transaction consummated, in Note 14.2019
In October 2018, the Company’s cannabis-licensed client with cultivatingcultivation and dispensingdispensary operations in Massachusetts, ARL Healthcare Inc. (“ARL”), filed a plan of entity conversion with the state to convert from a non-profit entity to a for-profit corporation, with the Company as the sole shareholder of the for-profit corporation. UponOn November 30, 2018, the conversion plan was approved by the secretary of state, and effective December 1, 2018, ARL was consolidated into the Company as a wholly-owned subsidiary.
In November 2018, the Company issued a letter of intent to acquire The Harvest Foundation LLC, its cannabis-licensed client with cultivation operations in the state of Nevada. The acquisition is conditioned upon legislative approval of the conversion plantransaction which is expected to occur in May 2019.
In December 2018, the Company entered into a memorandum of understanding to merge with Kind Therapeutics USA LLC, its cannabis-licensed client in the state of Maryland. The parties expect the merger agreement to be finalized, and the transaction approved by the state the for-profit corporation shall be wholly-owned by the Company as further disclosedlegislature in Note 14.2019.
In October 2018,January 2019, the Company acquired BSC Groupentered into an agreement with Maryland Health & Wellness Center Inc. (“MHWC”), an entity that has been pre-approved for a cannabis dispensing license, to provide MHWC with a construction loan in connection with the buildout of MHWC’s proposed dispensary 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 a 20% ownership interest of MWHC. 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 note receivable from Chooze Corp., an entity that develops CBD- and THC-infused products without debilitating side effects, into a 2.7% ownership interest in the entity.
In January 2019, the Company established MariMed Hemp Inc., a wholly-owned subsidiary to develop, market, and distribute hemp-based CBD brands and products, and to provide hemp producers with bulk quantities of hemp genetics and biomass.
In February 2019, the Company converted its $30 million purchase of subordinated secured convertible debentures of GenCanna Global, Inc., a producer and distributor of agricultural hemp, cannabidiol (“CBD”) formulations, hemp genetics, and hemp products into a 33.5% ownership interest.
In February 2019, the Company contracted to purchase a 70% interest in Meditaurus LLC, a multidisciplinary advisory firm that provides operational, marketing,company established by Dr. Jokubas Ziburkas who holds a PhD in neuroscience and licensing management services to companies withinis a leading authority on hemp-based CBD and the cannabis industry.endocannabinoid system. Meditaurus currently operates in the United States and Europe and has developed proprietary CBD formulations sold under itsFlorance brand.
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, 2017.2018.
Certain reclassifications have been made to prior periods’ data to conform to the current period presentation. These reclassifications had no effect on reported income (losses) or cash flows.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of MariMed Inc. and itsthe following majority-owned subsidiaries. subsidiaries:
| Subsidiary: | Percentage Owned | |||
| MariMed Advisors Inc. | 100.0 | % | ||
| Mia Development LLC | 89.5 | % | ||
| Mari Holdings IL LLC | 60.0 | % | ||
| Mari Holdings MD LLC | 97.4 | % | ||
| Mari Holdings NV LLC | 100.0 | % | ||
| Hartwell Realty Holdings LLC | 100.0 | % | ||
| iRollie LLC | 100.0 | % | ||
| ARL Healthcare Inc. | 100.0 | % | ||
| MariMed Hemp Inc. | 100.0 | % | ||
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.
Revenue RecognitionAccounts Receivable
Accounts receivable consist of trade receivables and are carried at their estimated collectible amounts.
The Company provides credit to its clients in the form of payment terms. The Company limits its credit risk by performing credit evaluations of its clients and maintaining a reserve, if deemed necessary, for potential credit losses. Such evaluations include the review of a client’s outstanding balances with consideration towards such client’s historical collection experience, as well as prevailing economic and market conditions and other factors. Based on such evaluations, the Company recorded a reserve of $150,000 at March 31, 2019 and December 31, 2018.
Inventory
Inventory is carried at the lower of cost or net realizable value, with the cost being determined on a first-in, first-out (FIFO) basis. The Company periodically reviews physical inventory and will record a reserve for excess and/or obsolete inventory if necessary. As of the date of this report, no reserve was deemed necessary.
Investments
The Company’s main sources of revenueCompany classifies its investments as available-for-sale-investments. Investments are comprised of: leasing of its developed cannabis cultivation, production,equity holding of private companies. These investments are recorded at fair value on the Company’s consolidated balance sheet, with changes to fair value, if any, included in comprehensive income. Investments are evaluated for other-than-temporary impairment and dispensary facilitiesare written down if such impairments are deemed to its cannabis-licensed clients; agreements to provide comprehensive oversight and corporate support to its clients’ operations; consulting services to companies operating in the medical and legal recreational cannabis industries; arrangements for the procurement of cannabis materials and resources; and licensing of branded cannabis products.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 – the Company generates rental income and additional rental fees from leasing its regulatory-compliant legal cannabis facilities to its clients, which are cannabis-licensed operating companies. Rental income is generally a fixed amount per month that escalates over the respective lease terms, while additional rental fees are based on a percentage of tenant revenues that exceed a specified amount. | |
| ● | Management – the Company receives fees for providing its clients with corporate services and operational oversight of their cannabis cultivation, production, and dispensary operations. These fees are based on a percentage of such clients’ revenue, and are recognized after services have been performed. | |
| ● | Supply Procurement – the Company maintains volume discounts with top national vendors of cultivation and production resources, supplies, and equipment, which the Company acquires and resells to its clients or third parties within the cannabis industry. The Company recognizes this revenue after the acceptance of goods by the purchaser. | |
| ● | Licensing – the Company’s derives 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 – the Company assists third-parties parties in securing cannabis licenses, and provides advisory services in the areas of facility design and development, and cultivation and dispensing best practices. The revenues associated with these services are recognized as the services are performed. | |
| ● | Product Sales – the Company is currently working towards generating revenues from direct sales of cannabis, hemp, and products derived from these plants. Such revenues are anticipated to come from (i) MariMed Hemp’s development of a hemp-derived CBD product line and wholesale hemp distribution business, and (ii) the dispensary and wholesale operations of ARL in Massachusetts and of the Company’s planned cannabis-licensee acquisitions in Pennsylvania, Illinois, Maryland, and Nevada. This revenue will be recognized at retail points-of-sale or when products are delivered. |
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 ninethree months ended September 30,March 31, 2019 and 2018, and 2017, based on its impairment analyses, the Company did not have any impairment losses.
Leases
The consolidated financial statements reflect the Company’s adoption of ASC 842,Leases, as amended by subsequent accounting standards updates, utilizing the modified retrospective transition approach which calls for applying the new standard to all of the Company’s leases effective January 1, 2019, which is the effective date of adoption.
ASC 842 is intended to improve financial reporting of leasing transactions. The most prominent change from previous accounting guidance is the requirement to recognize right-of-use assets and lease liabilities for the rights and obligations created by operating leases in which the Company is the lessee that extend more than twelve months on the balance sheet. The Company elected the package of practical expedients permitted under ASC 842. Accordingly, the Company accounted for its existing operating leases that commenced before the effective date as operating leases under the new guidance without reassessing (i) whether the contracts contain a lease, (ii) the classification of the leases (iii) the accounting for indirect costs as defined in ASC 842.
The Company determines if an arrangement is a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Non-lease components within lease agreements are accounted for separately. Right-of-use assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term, utilizing the Company’s incremental borrowing rate. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its fixed assets and other assets in accordance with ASC 360-10-15,Impairment or Disposal of Long-Lived Assets. Impairment of long-lived assets is recognized when the net book value of such assets exceeds their expected cash flows, in which case the assets are written down to fair value, which is determined based on discounted future cash flows or appraised values.
Fair Value of Financial Instruments
The Company follows the provisions of ASC 820,Fair Value Measurement, to measure the fair value of its financial instruments, and ASC 825,Financial Instruments,for disclosures on the fair value of its financial instruments. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by ASC 820 are:
| Level 1 | Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. |
| Level 2 | Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. |
| Level 3 | Pricing inputs that are generally observable inputs and not corroborated by market data. |
The carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their fair values due to the short maturity of these instruments.
The fair value of option and warrant issuances are determined utilizing the binomial optionsBlack-Scholes pricing model and employing several inputs such as the following inputs:expected life of instrument, the exercise price, the expected risk-free interest rate, the expected dividend yield, the value of the underlying securityCompany’s common stock on issuance date, and 2-yearthe expected volatility of underlying security.such common stock. No options or warrants were issued during the three months ended March 31, 2019. The following table summarizes the range of inputs used by the Company during the same period in 2018:
| Life of instrument | 3.0to 5.0 years | |||
| Volatility factors | 1.152to 2.086 | |||
| Risk-free interest rates | 1.92% to 2.25% | |||
| Dividend yield | 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 ninethree months ended September 30, 2018March 31, 2019 and 2017.2018.
Related Party Transactions
The Company follows ASC 850,Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.
In accordance with ASC 850, the Company’s financial statements include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business, as well as transactions that are eliminated in the preparation of financial statements.
Comprehensive Income
The Company reports comprehensive income and its components following guidance set forth by ASC 220,Comprehensive Income, which establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. There were no items of comprehensive income applicable to the Company during the period covered in the financial statements.
Earnings Per Share
Earnings per common share is computed pursuant to ASC 260,Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus the weighted average number of potentially dilutive securities during the period.
As of September 30,March 31, 2019 and 2018, and 2017, there were 15,497,82318,429,211 and 6,748,898,10,005,697, respectively, of potentially dilutive securities in the form of options and warrants. Also as of September 30, 2018 and 2017,such dates, there were zero and 500,000 shares, respectively, of subscriptions on convertible preferred stock, and $350,000 and $1,075,000,$550,000, respectively, of convertible promissory notes, and $8 million and zero, respectively, of convertible debentures payable, that were potentially dilutive, whose conversion into common stock is based on a discount to the market value of common stock on or about the future conversion date. For the ninethree months ended September 30, 2018,March 31, 2019, 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, resulting in identical calculations of basic and fully diluted net income per share that were identical for this period.share. 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 evaluateevaluates the perceived merits of thesuch 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 suchthe 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 February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 2019 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 November 2016, the FASB issued ASU No. 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash, which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. This ASU will bewas adopted effective inJanuary 1, 2019 with no impact to the Company’s financial statements and its impactrelated disclosures.
In June 2018, the FASB issued ASU 2018-07,Compensation - Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based Payment Accounting,which is dependent upon the level of restricted cashpart of the Company,FASB’s simplification initiative to maintain or improve the usefulness of the information provided to the users of financial statements while reducing cost and complexity in financial reporting. This update, which at this time is insignificant.provides consistency in the accounting for share-based payments to nonemployees with that of employees, was adopted effective January 1, 2019 with no material impact to the Company’s financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04,Intangibles - Goodwill and Other (Topic 350) which simplifies goodwill impairment testing by requiring that such periodic testing be performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures, which is effective for fiscal years, including interim periods, beginning after December 15, 2019.
In June 2018, the FASB issued ASU 2018-07,Compensation - Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based Payment Accounting,which is part of the FASB’s simplification initiative to maintain or improve the usefulness of the information provided to the users of financial statements while reducing cost and complexity in financial reporting. This update provides consistency in the accounting for share-based payments to nonemployees with that of employees. This update is effective for interim and annual reporting periods beginning after December 15, 2018, and the Company is currently evaluating its financial statement impact.
In addition to the above, the Company has reviewed all other recently issued, but not yet effective, accounting pronouncements, and does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.
NOTE 3 – ACQUISITIONS
Sigal Consulting LLC
In May 2014, the Company, through its subsidiary MariMed Advisors Inc., acquired Sigal Consulting LLC from its ownership group which included the current CEO and CFO of the Company (the “Sigal Ownership Group”). The purchase price received by the Sigal Ownership Group was comprised of (i) 31,954,236 shares of common stock valued at approximately $5,913.000, representing 50% of the Company’s outstanding shares on the closing date, (ii) options to purchase three million shares of the Company’s common stock, exercisable over five years with exercise prices ranging from $0.15 to $0.35, and valued at approximately $570,000, and (iii) a 49% ownership interest in MariMed Advisors Inc. The excess of purchase price over the book value of the acquired entity was recorded as goodwill, which was subsequently impaired in full and written down to zero.
In June 2017, the remaining 49% interest of MariMed Advisors Inc. was merged into the Company in exchange for an aggregate 75 million shares of common stock to the Sigal Ownership Group.
Betty’s Eddies™
In October 2017, the Company acquired the intellectual property, formulations, recipes, proprietary equipment, know-how, and other certain assets of the Betty’s Eddies™ brand of cannabis-infused fruit chews.chews, from Icky Enterprises LLC, a company partially owned by an officer of the company (“Icky”). The purchase price was $140,000 plus subscriptions on 1,000,000 shares of the Company’s common stock. Thestock valued at $370,000 based on the price of the common stock on the date of the agreement. These shares of common stock associated with these subscriptions were subsequently issued in June 2018. In addition,
The acquisition was accounted for in accordance with ASC 10,Business Combinations. The following table summarizes the selling companyallocation of the purchase price to the fair value of the assets acquired on the acquisition date:
| Inventory | $ | 46,544 | ||
| Machinery and equipment | 130,255 | |||
| Goodwill | 333,201 | |||
| Total fair value of consideration | $ | 510,000 |
The goodwill balance of approximately $333,000 was written down in 2018.
As part of the agreement between the parties, Icky shall receive royalties based on a percentage of the Company’s sales of the Betty’s Eddies™ product line, commencing at 25% and decreasing to 2.5% as certain sales thresholds are met. For the ninethree months ended September 30,March 31, 2019 and 2018, such royalties approximated $14,000, of which$20,000 and $5,000, were paid and $9,000 accrued at September 30, 2018.respectively.
After applying the total purchase price, which consisted of the cash paid plus the fair value of the subscribed common stock on the date of the transaction, to the assessed fair values of the assets purchased, the transaction gave rise to goodwill of approximately $333,000. At September 30, 2018 and December 31, 2017, the Company reviewed the goodwill for impairment and determined that, based on the present value of future cash flows of the acquired assets, there was no impairment. The goodwill was included inOther AssetsiRollie LLC in the Company’s financial statements.
In MayEffective April 2018, the Company issued $600,000entered into a purchase agreement whereby 264,317 shares of subscriptions onthe Company’s common stock in exchangewere exchanged for 100% of the ownership interests of iRollie LLC.LLC, a manufacturer of branded cannabis products and accessories for consumers, and custom product and packaging for companies in the cannabis industry. The Company acquired, among other assets, and liabilities, iRollie’s entire product line, service offerings, clients, and intellectual property, and hired its two co-founders. After applying
The acquisition was accounted for in accordance with ASC 10. The shares of Company common stock valued at $280,176 were issued to iRollie’s former owners in December 2018, at which time the Company adjusted the total goodwill generated on 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 down.
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 secretary of state, and effective December 1, 2018, ARL was consolidated into the Company as a wholly-owned subsidiary. Additionally, the Company’s chief operating officer was appointed as ARL’s sole board member.
The acquisition was accounted for in accordance with ASC 10,Business Combinations. The following table summarizes the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed on the acquisition date:
| Equipment | $ | 21,000 | ||
| Cannabis licenses | 185,000 | |||
| Accounts payable | (120,689 | ) | ||
| Due to related parties | (92,765 | ) | ||
| Total identifiable net assets | (7,454 | ) | ||
| Goodwill | 731,902 | |||
| Total fair value of consideration | $ | 724,448 |
The total consideration paid by the Company recordedwas equal to the forgiveness of amounts owed to the Company by ARL. Accordingly, the transaction gave rise to goodwill of approximately$119,000. At September 30, 2018, $732,000, which the Company determined thatwrote down. The cannabis licenses acquired comprised the goodwill had not been impaired, which was included inbalance ofOther AssetsIntangiblesin within the asset section of the Company’s financial statements.balance sheet at December 31, 2018. This intangible asset is being amortized over its estimated useful life, and at March 31, 2019, the carrying value less amortization was approximately $123,000.
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 (“AgriMed”).cannabis. AgriMed presently develops cannabis products that are wholesaled to medical marijuana dispensaries within the state. The purchase price is comprised of $8,000,000, a portion of which may be in the form of the Company’s common stock at the seller’s option, and the assumption of certain liabilities of AgriMed not to exceed $700,000. In February 2019, the Company filed a complaint against AgriMed for specific performance of their obligations under the purchase agreement. The parties are currently working towards a resolution of this matter.
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 required by state law, andpart of this transaction, the Company will also acquire the Sellers’ ownership interests of Mari Holdings IL LLC, the Company’s subsidiary which owns the real estate in orderwhich the KPGs’ dispensaries are located (“Mari-IL”).
The purchase price of 1,000,000 shares of the Company’s common stock shall be issued to effectuatethe Sellers upon the closing of the transaction, which is dependent upon, among other closing conditions, the approval by the Illinois Department of Financial and Professional Regulation. Such approval is expected to be received by mid-2019. After the transaction is effectuated, the KPGs and Mari-IL will be wholly-owned subsidiaries of the Company.
As of March 31, 2019, the Company had not yet received the legislative approval – required for all ownership changes of cannabis licensees – and therefore the operations of the KPGs were not consolidated in the Company’s financial statements as of such date. The Company anticipates approval will be obtained, and the transaction consummated, in 2019. When that occurs, the Company expects to consolidate the acquired entities in accordance with ASC 10.
The Harvest Foundation LLC
In November 2018, the Company issued a letter of intent to acquire 100% of the ownership interests of The Harvest Foundation LLC, the Company’s cannabis-licensed client in the state of Nevada. The parties have applied forare in the process of negotiating a definitive agreement governing the acquisition following the satisfactory completion of due diligence. The acquisition is conditioned upon the appropriate legislative approval of the changetransaction, which is expected to occur in AgriMed’s ownershipMay 2019. Accordingly, the operations of The Harvest Foundation LLC have not been consolidated for the three months ended March 31, 2019.
Kind Therapeutics LLC
In December 2018, the Company entered into a memorandum of understanding to merge with respectits cannabis-licensed client in Maryland, Kind Therapeutics LLC. A merger agreement is currently being drafted for this transaction, which is intended to qualify as a tax-deferred reorganization under the Internal Revenue Code. The parties expect the merger agreement to be finalized, and the transaction approved by the state legislature in 2019.
Meditaurus LLC
In February 2019, the Company entered into a binding letter of intent to acquire a 70% interest in Meditaurus LLC, a company established by Dr. Jokubas Ziburkas, a PhD in neuroscience who is a leading authority on CBD and its interactions with the brain and endocannabinoid system. Meditaurus currently operates in the United States and Europe and has developed proprietary CBD formulations sold under itsFlorance brand.
The purchase price of $2.8 million is comprised of cash up to $720,000 and the remainder in the Company’s acquisition.common stock. The Company expectsshall receive a license to receive written evidence thereofdistribute Meditaurus products in exchange for a license fee to be finalized prior to the endclosing of the 2018 fiscal year, at which timetransaction. In addition, the Company will consolidateshall hire Dr. Ziburkas and other members of the operations of AgriMed in accordance with GAAP.Meditaurus executive team. The transaction is conditioned upon the successful due diligence by the parties as well as ownership and regulatory approvals, as required. The Company anticipates definitive agreements to be executed and the deal closed within 120 days.
NOTE 4 – INVESTMENTS
At March 31, 2019 and December 31, 2018, the Company’s investments were comprised of the following:
March 31, | December 31, | |||||||
| GenCanna Global Inc. | $ | 32,234,402 | $ | - | ||||
| CVP Worldwide LLC | 1,125,482 | 1,172,163 | ||||||
| Iconic Ventures Inc. | 500,000 | 500,000 | ||||||
| Chooze Corp. | 257,687 | - | ||||||
| Total investments | $ | 34,117,571 | $ | 1,672,163 | ||||
GenCanna Global Inc.
During 2018, in a series of transactions, the Company purchased $30 million of subordinated secured convertible debentures (the “GC Debentures”) of GenCanna Global, Inc., a producer and distributor of agricultural hemp, CBD formulations, hemp genetics, and hemp products (“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 on a fully diluted basis.
The investment has been accounted under the equity method. Accordingly, the Company recorded equity in earnings of approximately $2,005,000 based its percentage equity of GenCanna’s net income from the date of conversion through March 31, 2019. Such amount increased the carrying value of the investment to approximately $32,234,000 at March 31, 2019.
CVP Worldwide LLC
In August 2018, the Company invested $100,000,$300,000, of a total contracted cash investment of $500,000, and agreed to issueissued 378,259 shares of common stock, valued at approximately $915,000, in exchange for 23% ownership in an entity that providesCVP 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 whose product is branded Sprout. The investment balance at September 30, 2018 of $100,000 is included inOther Assetson the Company’s balance sheet. After the total cash and stock investment is made, which is expected to occur prior to the end of the 2018 fiscal year, the investment shall be accounted for under the equity method.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 the revenueSprout’s revenues generated from sales of Sprout (i) to its currentthe Company’s clients, and (ii) made by the Company to third parties. As of September 30,December 31, 2018, no suchrevenue share was earned by the Company.
The investment has been accounted under the equity method. In 2018, the Company recorded a charge to net income of revenue was earned.approximately $43,000 based on its equity in CVP’s net loss during the period of the Company’s ownership. Such amount reduced the carrying value of the investment to approximately $1,172,000 at December 31, 2018. For the three months ended March 31, 2019, the Company recorded a charge of approximately $48,000 representing the Company’s equity in CVP’s net loss during this period, further reducing the carrying value of the investment to approximately $1,125,000 at March 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 price of $500,000. Iconic, a private company, 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 an ownership percentage in Iconic of 8.75%. The Company was not given a board seat and does not have ability to exert operational or financial control over the entity. In accordance with ASC 321,Investments – Equity Securities, the Company elected the measurement alternative to value this equity investment without a readily determinable fair value. Under this alternative measurement election, the investment is recorded at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment in Iconic. Following the Company’s purchase, there has been no impairment to this investment, nor any observable price changes to investments in Iconic. Accordingly, this investment was carried at $500,000 at March 31, 2019 and December 31, 2018.
The Company will continue to apply the alternative measurement guidance until this investment does not qualify to be so measured. The Company may subsequently elect to measure this investment at fair value, and if so, shall measure all identical or similar investments in Iconic at fair value. Any subsequent changes in fair value shall be recognized in net income.
Chooze Corp.
In January 2019, the entire principal and accrued interest balance of a note receivable from Chooze Corp. of approximately $258,000 was converted into a 2.7% ownership 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 March 31, 2019.
Vitiprints
In August 2018, the Company invested $250,000 to obtainentered into a licensing agreement for the exclusive worldwide license to sublicense, use, develop, sublicense, promote, sell or otherwise commercialize in any way a patented technology to produce and distribute cannabis products with exceedingly precise dosing at increased production economies (“the Vitiprints license”License”). The amount investedlicensing agreement has an initial term of five years, with an option to renew the agreement for successive five-year periods, provided that notice of renewal is delivered prior to the expiration of the initial term or a renewal term.
Pursuant to the agreement, the Company made a non-refundable payment of $250,000 which was expensed and is included incharged toCost of Revenues Including Depreciation within the financial statements.
Under this licensing agreement,in August 2018. In addition, the Company shall pay a royalty to Vitiprints equal to 10% of the net revenue, as defined, earnedreceived by the Company from salescommercialization of the Vitiprints license,License, with a minimum royalty payment of $250,000 due on the date of the first commercial sale of a licensed product. In order to maintain the exclusivity of the license, the Company shall make minimum royalty payments of (i) $500,000 for the year following the first sale date, as defined, (ii) $750,000 for the following year, and (iii) $1,000,000 for all remaining years during the initial five-year term,or renewal terms.
NOTE 5 – DEFERRED RENTS RECEIVABLE
The Company is the lessor under six operating leases which contain rent holidays, escalating rents over time, options to renew, requirements to pay property taxes, insurance and/or maintenance costs, and $250,000 for each five-year renewal term,contingent rental payments based on a percentage of monthly tenant revenues. The Company is not the lessor to any finance leases.
The Company recognizes fixed rental receipts from such lease agreements on a straight-line basis over the expected lease term. Differences between amounts received and amounts recognized are recorded underDeferred Rents Receivable on the balance sheet. Contingent rentals are recognized only after tenants’ revenues are finalized and if renewed. such revenues exceed certain minimum levels.
The Company leases the following owned properties:
| ● | Delaware – a 45,000 square foot facility purchased in September 2016 and built into a cannabis cultivation, processing, and dispensary facility which is leased to a cannabis-licensed client occupying 100% of the space under a 20-year triple net lease expiring in 2035. | |
| ● | Illinois – two 3,400 square foot free-standing retail dispensaries in the cities of Anna and Harrisburg and leased to two licensed cannabis dispensary clients each under a 20-year lease expiring in 2036. | |
| ● | Maryland – a 180,000 square foot former manufacturing facility purchased January 2017 and rehabilitated by the Company into a cultivation and processing facility which is leased to a licensed cannabis client under a 20-year triple net lease that started in January 2018. | |
| ● | Massachusetts – a 138,000 square foot industrial property of which approximately half of the available square footage is leased to a non-cannabis manufacturing company under a five-year lease. |
The Company subleases the following property:
| ● | Delaware – 4,000 square feet of retail space in a multi-use building space which the Company developed into a cannabis dispensary which is subleased to its cannabis-licensed client under a under a five-year triple net lease with a five-year option to extend. |
As of September 30,March 31, 2019 and December 31, 2018, nocumulative fixed rental receipts under such netleases approximated $6.4 million and $5.4 million, respectively, compared to revenue was earned.recognized on a straight-line basis of approximately $8.5 million and $7.5 million. Accordingly, the deferred rents receivable balances at March 31, 2019 and December 31, 2018 approximated $2.1 million and at the end of both periods.
Future minimum rental receipts for non-cancelable leases and subleases as of March 31, 2019 were:
| 2019 | $ | 3,101,253 | ||
| 2020 | 4,222,040 | |||
| 2021 | 4,368,640 | |||
| 2022 | 4,293,999 | |||
| 2023 | 3,997,651 | |||
| Thereafter | 48,942,935 | |||
| Total | $ | 68,926,518 |
NOTE 6 – DUE FROM THIRD PARTIES
At March 31, 2019 and December 31, 2018, the following amounts were advanced by the Company to its cannabis-licensed clients primarily for working capital purposes:
March 31, 2019 | December 31, 2018 | |||||||
| Kind Therapeutics USA Inc. (Maryland licensee) | $ | 1,437,902 | $ | 2,679,496 | ||||
| KPG of Anna LLC (Illinois licensee) | 67,163 | 482,700 | ||||||
| KPG of Harrisburg LLC (Illinois licensee) | 57,032 | 449,385 | ||||||
| Harvest Foundation LLC (Nevada licensee) | 734,066 | 248,796 | ||||||
| Total due from third parties | $ | 2,296,163 | $ | 3,860,377 | ||||
When a client is able to organically fund its ongoing operations, such client will issue a promissory note to the Company for the cumulative advances made up to that point, which will then be paid down monthly over a period of time. The Company has successfully employed this strategy in the past, and accordingly, in January 2019, KPG of Anna LLC and KPG of Harrisburg LLC issued promissory notes to the Company as described inNote 7 –Notes Receivable.
NOTE 57 – NOTES RECEIVABLE
In September 2018, the Company purchased $6.75M of subordinated secured convertible debentures (the “GC Debentures”) of GenCanna Global, Inc., a producerAt March 31, 2019 and distributor of agricultural hemp, cannabidiol (CBD) formulations, hemp genetics, and hemp products (“GenCanna”). The GC Debentures bear interest at a compounded rate of 9% per annum and mature three years from issuance.
The GC Debentures are convertible into the common stock of GenCanna, at the Company’s option, (i) upon the occurrence of a Liquidity Event, as defined in the GC Debentures, or (ii) after December 31, 2018, upon ten days prior written notice to GenCanna. The conversion price is equal to the lesser of a 20% discount to the pricenotes receivable were comprised of the Liquidity Event, or the price based on a defined post-money valuation of GenCanna. If a Liquidity Event does not occur on or before June 30, 2020, the Company shall have the option to be redeemed in cash for the principal amount of the GC Debenture plus all accrued and unpaid interest thereon.following:
Subsequent to September 30, 2018, the Company entered into a subscription agreement with GenCanna to purchase an aggregate of $30 million of GC Debentures, as disclosed in Note 14 below.
| March 31, 2019 | December 31, 2018 | |||||||
| First State Compassion Center | $ | 566,452 | $ | 578,723 | ||||
| Healer LLC | 512,103 | 307,429 | ||||||
| KPG of Anna LLC | 449,134 | - | ||||||
| KPG of Harrisburg LLC | 398,803 | - | ||||||
| Chooze Corp. | - | 257,687 | ||||||
| Total notes receivable | 2,236,592 | 1,143,839 | ||||||
| Notes receivable, current portion | 64,392 | 51,462 | ||||||
| Notes receivable, less current portion | $ | 2,172,200 | $ | 1,092,377 | ||||
During the nine months ended September 30, 2018, the Company loaned an aggregate of $300,000 to two third-party companies in the cannabis industry. The loans plus accrued interest at the rate of 8% per annum are expected to be repaid by the end of fiscal year 2019.
The Company loaned approximately $700,000 to First State Compassion Center, its Delaware cannabis-licensee client, during the period of October 2015 to April 2016. In May 2016, this client issued a 10-year promissory note, as amended, to the Company bearing interest at a compounded rate of 12.5% per annum. The monthly payments of approximately $10,100 will continue through April 2026, at which time the note will be fully paid down. At September 30, 2018March 31, 2019 and December 31, 2017,2018, the current portion of this note comprised thewas approximately $53,000 and $51,000, respectively, and included inNote Receivable, Current Portion amounts on the balance sheet,sheets.
During the period August to October 2018, the Company loaned $300,000 to Healer LLC, an entity that provides cannabis education, dosage programs, and products developed by Dr. Dustin Sulak, an integrative medicine physician and nationally renowned cannabis practitioner. In January and February 2019, the company loaned Healer an additional $200,000. The loans bear interest at 6% per annum, with principal and interest payable on the maturity date which is three years from issuance.
In January 2019, KPG of Anna LLC and KPG of Harrisburg LLC each issued a promissory note to the Company in the amount of approximately $451,000 and $405,000, respectively, representing the advances made by the Company to these entities through December 31, 2018. The notes bear interest at 12% per annum, with monthly principal and interest payments due through December 2038. At March 31, 2019, the current portion of these notes approximated $11,000 in the aggregate.
During the period May to October 2018, the Company loaned $250,000 to Chooze Corp. bearing interest at 8% per annum and maturing in 2021. In January 2019, the entire principal and accrued interest balance of approximately $258,000 was converted into a 2.7% ownership interest in Chooze.
NOTE 8 – SEED INVENTORY
During the three months ended March 31, 2019, MariMed Hemp Inc. (“Mari-Hemp”), the Company’s wholly-owned subsidiary operating in the emerging global hemp market, purchased $3.25 million of hemp seeds meeting the U.S. government’s definition of federally legal industrial hemp, which was descheduled as a controlled substance and classified as an agricultural commodity upon the signing of the 2018 Farm Bill. Mari-Hemp intends to use the seeds to conduct a wholesale hemp distribution business and to develop a hemp-derived CBD product line.
NOTE 9 – DEBENTURES RECEIVABLE
As detailed inNote 4 –Investments, the Company converted the GC Debentures into a 33.5% ownership interest in GenCanna in February 2019. Prior to conversion, the GC Debentures bore interest at a compounded rate of 9% per annum and had an original maturity of three years from issuance. For the year ended December 31, 2018, the Company earned and received interest income of approximately $502,000 on the GC Debentures.
Among other provisions of the subscription agreement governing the GC Debentures, the Company agreed to fund a $10 million employee bonus pool should GenCanna meet certain 2019 operating targets, and the long-term portionCompany’s CEO was appointed as a director to GenCanna’s board. Additionally, pursuant to a rights agreement, the Company was granted certain rights including the rights of approximately $541,000inspection, financial information, and $579,000, respectively, along with the aforementioned notes receivableparticipation in this Note 5, were reflected in the captionNotes Receivable, Less Current Portion.future security offerings of GenCanna.
NOTE 610 – PROPERTY AND EQUIPMENT
PropertyAt March 31, 2019 and December 31, 2018, property and equipment are shown net of accumulated depreciation and are primarily comprisedconsisted of the following: land; buildings; building and tenant improvements; furniture and fixtures; and machinery and equipment.
| March 31, 2019 | December 31, 2018 | |||||||
| Land | $ | 3,392,710 | $ | 3,392,710 | ||||
| Buildings and building improvements | 13,651,246 | 13,566,144 | ||||||
| Tenant improvements | 5,392,287 | 5,348,882 | ||||||
| Furniture and fixtures | 143,237 | 114,160 | ||||||
| Machinery and equipment | 1,872,681 | 1,632,351 | ||||||
| Construction in progress | 13,345,944 | 12,205,447 | ||||||
| 37,798,105 | 36,259,694 | |||||||
| Less: accumulated depreciation | (2,375,970 | ) | (2,159,830 | ) | ||||
| Property and equipment, net | $ | 35,422,135 | $ | 34,099,864 | ||||
During the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, additions to property and equipment were approximately $7.3$1.5 million and $11.5$1.3 million, respectively.
The 2018 additions were primarily comprised of (i) the buildout of properties in Hagerstown, MD, New Bedford, MA, and Middleborough, MA, and (ii) improvements to the Lewes, DE facility. The 2019 additions consisted primarily of the continued buildout of properties in Hagerstown, MD, New Bedford, MA, and Middleborough, MA.
The December 31, 2018 construction in progress balance of approximately $12.2 million was primarily comprised of (i) New Bedford, MA building, improvements and machinery of approximately $9.8 million and (ii) Middleborough, MA building, improvements and fixtures of approximately 2.4 million. The additions to construction in progress during the three months ended March 31, 2019 of approximately $1.1 million consisted of continuing buildout and machinery for the New Bedford, MA and Middleborough, MA properties.
Depreciation expense for the ninethree months ended September 30,March 31, 2019 and 2018 and 2017 was approximately $446,000$218,000 and $264,000,$81,000, respectively. At September 30, 2018 and December 31, 2017, accumulated depreciation approximated $1,944,000 and $1,499,000, respectively.
NOTE 711 – DEBT
During the nine months ended September 30, 2018,Mortgages
In November 2017, the Company received additional capitalentered into a 10-year mortgage agreement with Bank of approximately $1,998,000 fromNew England for the existing mortgage onpurchase of a 138,000 square foot industrial property in New Bedford, Massachusetts, within which the Company has built a 70,000 square foot cannabis cultivation and processing facility itthat is currently developing inleased to ARL. From the statestart of Massachusetts.the mortgage through May 2019, the Company is required to make monthly payments of interest-only at a rate equal to the monthly prime rate plus 2%, with a floor of 6.25%. From May 2019 to May 2024, the Company shall make principal and interest payments at a rate equal to the prime rate on May 2, 2019 plus 2%, with a floor of 6.25%. Principal and interest payments shall continue from May 2024 through the end of the lease at a rate equal to the prime rate on May 2, 2024 plus 2%, with a floor of 6.25%. The principal balance on this mortgage was $4,895,000 on both March 31, 2019 and December 31, 2018, of which approximately $91,000 and $63,000, respectively, was current.
The Company maintains another mortgage with Bank of New England for the 2016 purchase of a 45,070 square foot building in Wilmington, Delaware which was developed into a cannabis seed-to-sale facility and is currently leased to the Company’s cannabis-licensed client in the state. The mortgage matures in 2031 with monthly principal and interest payments at a rate of 5.25% through September 2021, and thereafter the rate adjusting every five years to the then prime rate plus 1.5% with a floor of 5.25%. At March 31, 2019 and December 31, 2018, the principal balance on this mortgage was approximately $1,767,000 and $1,792,000, respectively, of which approximately $103,000 and $102,000, respectively, was current.
In 2016, the Company entered into a mortgage agreement with DuQuoin State Bank (“DSB”) for the purchase of two properties that it developed into two 3,400 square foot free-standing retail dispensaries that are currently leased to the KPGs. On May 5thof each year, this mortgage is due to be repaid unless it is renewed for another year at a rate determined at the discretion of DSB’s executive committee. The Company has been notified by DSB that the mortgage will be renewed in May 2019. At March 31, 2019 and December 31, 2018, the principal balance on this mortgage was approximately $845,000 and $850,000, respectively, of which approximately $23,000 was current at the end of both periods.
Promissory Notes
In March 2019, the Company raised $6 million from the issuance of a secured promissory note maturing in December 2019 and bearing interest at the rate of 13% per annum, with interest payable monthly. The Company may elect to prepay the note in whole or part without penalty upon three business days’ notice and with payment of all interest through the maturity date. The Company may extend the maturity date by up to three months upon thirty days’ notice prior to the maturity date with an extension fee payment to the note holder of $300,000. At March 31, 2019, the carrying value of this note was $6 million.
In September 2018, the Company raised $3,000,000$3 million from the issuance of a secured promissory note bearing interest at the rate of 10% per annum, with interest payable monthly. The note is due and payable in September 2019, however the Company may elect to prepay the note in whole or part at any time after December 17, 2018 without premium or penalty. In addition, theThe Company issued three-year warrants, which were attached to lenderthis promissory note, to the lender’s designees to purchase 750,000 shares of the Company’s common stock at an exercise price of $1.80 per share. The Company recorded a discount on the note of approximately $1,511,000 from the allocation of note proceeds to the warrants based on the fair value of such warrants on the issuance date. Approximately $882,000 of the warrant discount was amortized to interest expense during 2018, and the remaining $629,000 was amortized during the three months ended March 31, 2019. The carrying value of this note was $3 million at March 31, 2019 and approximately $2.37 million, net of remaining warrant discount of $629,000, at December 31, 2018.
During the nine months ended September 30, 2017, the Company raised $3,650,000 from the issuance of promissory notes, each with an interest rate of 10% per annum and an initial term of 6 months with the ability to extend.
In August 2018, the holder of previously issued promissory notes with principal balances of $3,250,000 converted such promissory notes into subscriptions on 1,231,060 shares of common stock at a conversion price equal to the market value of the stock on the conversion date of $2.64 per share.
During the nine months ended September 30, 2018, holders of previously issued promissory notes with principal balances of $5,175,000 and accrued and unpaid interest of approximately $93,000$1,075,000 converted such promissory notes into 4,018,5341,568,375 shares of common stock at conversion prices ranging from $0.65 to $1.75$0.90 per share. The conversions resulted in the recording of non-cash losses of approximately $3,210,000$829,000 in the aggregate, based on the market value of the common stock on the conversion dates. No such conversions occurred during the three months ended March 31, 2019
During the nine months ended September 30, 2017,2018, the Company issued 4,385,8232,596,313 shares of common stock and subscriptions on 79,136 shares of common stock to retire promissory notes with principal balances of $2,050,000 plus$7,495,000 and approximately $262,000$95,000 of accrued and unpaid interest. The Company recorded a non-cash losslosses of approximately $451,000$2.5 million based on the fair value of the common stock on the transaction date. These former noteholders also received warrants to purchase 863,898 shares of common stock. The fair value of these warrants recorded byretirement dates. No such retirements were made during the Company on the grant date approximated $257,000.three months ended March 31, 2019.
During the nine months ended September 30, 2018 the Company repaid $700,000 of promissory notes. No repayments of debt occurred during the samethree months ended March 31, 2019.
The aggregate scheduled maturities of the Company’s total debt outstanding, inclusive of the promissory notes and mortgages described within thisNote 11 –Debt, and the convertible debentures described in the followingNote 12 –Debentures Payable, as of March 31, 2019 were:
| 2019 | $ | 11,643,995 | ||
| 2020 | 8,570,954 | |||
| 2021 | 5,235,827 | |||
| 2022 | 251,543 | |||
| 2023 | 268,338 | |||
| Thereafter | 5,544,225 | |||
| Total | 31,514,882 | |||
| Less discounts | (9,833,000 | ) | ||
| $ | 21,681,882 |
NOTE 12 – DEBENTURES PAYABLE
In October and November 2018, pursuant to a securities purchase agreement (the “SPA”), the Company sold an aggregate of $10,000,000 of convertible debentures bearing interest at the rate of 6% per annum that mature two years from issuance, with a 1% issue discount, resulting in net proceeds to the Company of $9,900,000 (the “$10M Debentures”).
The holder of the $10M Debentures (the “Holder”) has the right at any time to convert all or a portion of the $10M Debenture, along with accrued and unpaid interest, into the Company’s common stock at conversion prices equal to 80% of a calculated average, as determined in the $10M Debentures, of the daily volume-weighted price during the ten consecutive trading days preceding the date of conversion. Notwithstanding this conversion right, the Holder shall limit conversions in any given month to certain agreed-upon values based on the conversion price, and the Holder shall also be limited from beneficially owning more than 4.99% of the Company’s outstanding common stock (potentially further limiting the Holder’s conversion right).
The Company shall have the right to redeem all or a portion of the $10M Debentures, along with accrued and unpaid interest, at a 10% premium, provided however that the Company first provide advance written notice to the Holder of its intention to make a redemption, with the Holder allowed to affect one or more conversions of the $10M Debentures during such notice period.
Upon a change in control transaction, as defined in the $10M Debentures, the Holder may require the Company to redeem all or a portion of the $10M Debentures at a price equal to 110% of the principal amount of the $10M Debentures plus all accrued and unpaid interest thereon. So long as the $10M Debentures are outstanding, in the event the Company enters into a Variable Rate Transaction (“VRT”), as defined in the SPA, the Holder may cause the Company to revise the terms of the $10M Debentures to match the terms of the convertible security of such VRT. As part of issuance of the $10M Debenture, the Company issued three-year warrants to the Holder to purchase 324,675 shares of common stock at exercise prices of $3.50 and $5.50 per share (the “Warrants”).
Pursuant to the terms of a registration rights agreement with the Holder, entered into concurrently with the SPA and the $10M Debentures, the Company agreed to provide the Holder with customary registration rights with respect to any potential shares issued pursuant to the terms of the SPA, the $10M Debentures, and the Warrants.
Subsequent to the consummation of the SPA and related agreements, the Company and the Holder executed an addendum to the SPA whereby the Holder agreed to that it would not undertake a conversion of all or a portion of the $10M Debentures that would require the Company to issue more shares than the amount of available authorized shares at the time of conversion, which amount of authorized shares shall not be less than the current authorized number of 500 million shares of common stock. Such addendum eliminated the requirement to bifurcate and account for the conversion feature of the $10M Debentures as a derivative.
Based on the conversion prices of the $10M Debentures in relation to the market value of the Company’s common stock, the $10M Debentures provided the Holder with a beneficial conversion feature, as the embedded conversion option was in-the-money on the commitment date. The intrinsic value of the beneficial conversion feature of approximately $5.6 million was recorded as a discount to the carrying amount of the $10M Debentures, with an offset to additional paid-in-capital.
In addition to the discount related to the beneficial conversion feature, an additional discount of approximately $1.057 million was recorded based on the allocation of proceeds to the fair value of the Warrants attached to the debt.
In November and December 2018, the Holder converted $1,400,000 of principal and approximately $36,000 of accrued interest into 524,360 shares of common stock at conversion prices of $2.23 and $3.04 per share. In January 2019, the Holder converted $600,000 of principal and approximately $97,000 of accrued interest into 233,194 shares of common stock at conversion prices ranging from $2.90 and $3.06 per share
During the three months ended March 31, 2019, amortization of the beneficial conversion feature, after adjustment for the conversions, approximated $757,000; amortization of the Warrants discount approximated $131,000; and the amortization of original issue discount approximated $12,000. This amortization was charged to interest expense. Additionally, accrued interest expense on the notes for such period in 2017.approximated $123,000 of which approximately $88,000 was paid prior to the end of the period.
At March 31, 2019, the outstanding principal balance on the $10M Debentures was $8 million. Also on such date, the unamortized balances of the beneficial conversion feature, Warrants discount, and original issue discount were approximately $3,290,000, $836,000, and $79,000, respectively. Accordingly, at December 31, 2018, the carrying value of the $10M Debentures was approximately $3,795,000.
At December 31, 2018, the outstanding principal balance on the $10M Debentures was $8.6 million. Also on such date, the unamortized balances of the beneficial conversion feature, Warrants discount, and original issue discount were approximately $4.1 million, $966,000, and $91,000, respectively, and accrued and unpaid interest was approximately $62,000. Accordingly, at December 31, 2018, the carrying value of the $10M Debentures was approximately $3.6 million.
NOTE 813 – EQUITY
Preferred Stock
In January 2017, the Company increased the number of authorized2018, all 500,000 shares of preferred stock from 5 million to 50 million shares.
During the nine months ended September 30, 2017, the Company issued subscriptions on 200,000 shares ofsubscribed Series A convertible preferred stock were converted into 970,988 shares of common stock at $1.00a conversion price of $0.55 per share. No subscriptions were issued duringThe Company recorded a non-cash loss on conversion of approximately $34,000 based on the same period in 2018.market value of the common stock on the conversion date.
The Series A convertible preferred stock accrues an annual dividend of six percent6% until conversion, andconversion. The preferred stock is convertible, along with any accrued dividends, into common stock at a twenty-five percent discount to the selling price of the common stock in a qualified offering, as defined in the subscription agreement. In addition, the Company shall havehas 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.
In January 2018, all 500,000 shares of subscribed Series A convertible preferred stock were converted into 970,989Common Stock
During the three months ended March 31, 2019, the Company sold 799,995 shares of common stock at a conversion price of $0.55$3.25 per share. Theshare, resulting in total proceeds of $2.6 million. During the same period in 2017, 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 three months ended March 31, 2019, the Company issued 97,136 common shares associated with previously issued subscriptions on common stock with a value of approximately $169,000. No such issuances occurred during the same period in 2018.
During the three months ended March 31,2018, the Company issued 295,000 shares, in exchange for services rendered by third-parties or to otherwise settle outstanding obligations. Based on the market value of the common stock on the dates of issuance, the Company recorded a non-cash losslosses on conversionthese settlements of approximately $34,000$204,000. No such issuances were made in 2019.
As previously disclosed inNote 12 –Debentures Payable, in January 2019, the Holder of the $10M Debentures converted $600,000 of principal and approximately $97,000 of accrued interest into 233,194 shares of common stock.
As further disclosed inNote 14 –Stock Options, during the three months ended March 31, 2019 and 2018, 260,015 and 300,000 shares of common stock, respectively, were issued in connection with the exercise of stock options.
As further disclosed inNote 15 –Warrants, during the three months ended March 31, 2019 and 2018, warrants to purchase 22,000 and 89,614 shares of common stock were exercised.
Common Stock Subscribed But Not Issued
At December 31, 2018, there were outstanding subscriptions on 79,136 shares of common stock related to the settlement of a previously issued promissory note with a principal balance of $50,000 and accrued interest of $1,454. These subscriptions had a value of approximately $95,000 based on the market value of the common stock on the conversionsettlement date. No sharesAlso outstanding on such date were converted during the same period in 2017.
Common Stock
In January 2017, the Company increased the number of authorizedsubscriptions on 18,000 shares of common stock, from 100 millionequivalent to 500 million shares.
In June 2017,an aggregate amount of approximately $74,000, for the Company issued 75 millionpayment of rent for the months of September 2018 through January 2019 for a leased property in Massachusetts. The shares of common stock to acquire the remaining 49% interestassociated with all outstanding subscriptions at December 31, 2018 were issued in its subsidiary MariMed Advisors Inc.March 2019.
During the ninethree months ended September 30,March 31, 2018, the Company sold 14,189,738issued subscriptions on 1,319,432 shares of common stock, at prices ranging from $0.50 to $2.70of $0.65 and $0.95 per share, resulting in total proceeds of $16,896,000. During$875,000. No subscriptions on common stock were issued during the same period in 2017,2019.
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 sold 22,178,888recorded a non-cash loss on these conversions of approximately $652,000. No such conversions occurred in 2019.
During the three months ended March 31, 2018, the Company issued subscriptions on 738,462 shares of common stock at prices of $0.18 and $0.25 per share, resulting in total proceeds of $5,150,000.
During the nine months ended September 30, 2018 and 2017, the Company issued 3,350,934 and 531,597 shares of common stock, respectively for services rendered by third parties.to settle an outstanding obligation. The Company recorded a non-cash lossesloss of approximately $1,015,000 in 2018 and $31,000 in 2017,$459,000 based on the market value of the common stock on the issuance dates.settlement date. No such settlements were made in 2018.
Subscribed Common Stock
In September 2017, options to purchase 4.8 million shares of common stock were exercised at prices ranging from $0.010 to $0.025, as discussed in Note 9 below. Of this amount, 4.5 million shares were exercised by the former CEO of the Company, who is currently a board member, and 300,000 shares were exercised by the former CFO of the Company. The shares of common stock were issued to these individuals in October 2017.
In October 2017, the Company issued subscriptions on 1,000,000 shares of common stock as part of the purchase price of the Betty’s Eddies™ acquired assets, as disclosed in Note 3. These subscriptions, valued at $370,000 based on the price of the common stock on the issuance date, were classified underCommon Stock Subscribed But Not Issued within the equity section of the Company’s balance sheet at December 31, 2017.The shares of common stock associated with these subscriptions were issued in June 2018.
During the nine months ended September 30, 2018, the Company issued (i) subscriptions on 264,317 shares of common stock to acquire iRollie LLC, valued at $600,000 based on the price of the common stock on the issuance date, as disclosed in Note 3, (ii) subscriptions on 2,894 shares of common stock, equivalent to an aggregate amount of $10,000, for the payment of rent for the month of September 2018 for a leased property in Massachusetts, and (iii) subscriptions on 1,231,060 shares of common stock to convert previously issued promissory notes with principal balances of $3,250,000 at a conversion price of $2.64 per share, as disclosed in Note 7. These subscriptions on common stock were classified underCommon Stock Subscriptionswithin the current liabilities section of the Company’s balance sheet.
Membership Interests
During the nine months ended September 30, 2018, an individual member of Mari Holdings MD LLC, a majority owned subsidiary of the Company, exchanged his membership interest in such subsidiary for 222,222 shares of the Company’s common stock. During the nine months ended September 30, 2017, the Company issued 1,667 Class A membership units of Mari-MD for $150,000, representing 0.33% ownership of this subsidiary on the transaction date.
In September 2018, a receivable balance of $25,000, related to previously issued membership interests in a majority-owned subsidiary, was settled by way of the membership interest holder providing consulting services to the Company at a value equivalent to the outstanding balance.
NOTE 914 – STOCK OPTIONS
In JanuaryDuring 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 was amortized over the six-month vesting periodperiods, with approximately $366,000 incurred during the ninethree months ended September 30,March 31, 2018. No stock options were granted in 2019.
During the ninethree months ended September 30, 2018, the Company grantedMarch 31, 2019 and 31, options to purchase 850,000 shares of common stock to newly-hired employees at exercise prices ranging from $0.90 to $2.65 per share, expiring five years from the grant date. As of September 30, 2018, the Company recorded approximately $181,000 of the total fair value of these grants of approximately $2,083,000, which is being amortized over the five-year vesting periods.
During the nine months ended September 30, 2017, the Company granted options to purchase400,000 and 300,000 shares of common stock, to newly-hired employees at exercise prices ranging from $0.26 to $0.55, and expiring in September 2020, March 2021, and April 2021. The fair value of these options on the grant date approximated $73,000, of which approximately $46,000 is being amortized over the respective vesting periods, and approximately $27,000 was forfeited by the option holder.
During the nine months ended September 30, 2018, options to purchase 700,000 shares of common stockrespectively, were exercised at exercise prices ranging from $0.08 to $0.63$0.77 per share by a current board member (400,000 shares)in 2019, and $0.13 per share in 2018. Of the former CFOoptions exercised in 2019, 350,000 were cashless exercises, with the exercise price paid via the surrender of the Company (300,000 shares). 139,985 shares of common stock.
During the same periodthree months ended September 30, 2017,March 31, 2018, options to purchase 4.8 million shares of common stock300,000 were exercised at prices ranging from $0.010 to $0.025. As discussedforfeited. There were no forfeitures in Note 8 above, of the total exercised shares during this period, 4.5 million shares were exercised by the former CEO of the Company, who is currently a board member, and 300,000 shares were exercised by the former CFO of the Company. The former CEO’s exercise price of $0.01 per share, or $45,000 in the aggregate, was paid with the surrender of 90,000 shares of common stock. These surrendered shares were classified as treasury stock.2019
Options to purchase 300,000 shares of common stock were forfeited during the nine-month period ended September 30, 2018. No options were forfeited during the same period in 2017.
Stock options outstanding and exercisable as of September 30, 2018March 31, 2019 were:
| Exercise Price | Shares Under Option | Remaining | ||||||||||||
| per Share | Outstanding | Exercisable | Life in Years | |||||||||||
| $ | 0.080 | 250,000 | 250,000 | 0.33 | ||||||||||
| $ | 0.080 | 100,000 | 100,000 | 1.22 | ||||||||||
| $ | 0.130 | 200,000 | 200,000 | 1.75 | ||||||||||
| $ | 0.140 | 650,000 | 650,000 | 2.25 | ||||||||||
| $ | 0.150 | 1,000,000 | 1,000,000 | 0.99 | ||||||||||
| $ | 0.250 | 1,000,000 | 1,000,000 | 0.99 | ||||||||||
| $ | 0.260 | 50,000 | 50,000 | 2.51 | ||||||||||
| $ | 0.330 | 50,000 | 25,000 | 2.44 | ||||||||||
| $ | 0.350 | 1,000,000 | 1,000,000 | 0.99 | ||||||||||
| $ | 0.450 | 250,000 | 125,000 | 3.01 | ||||||||||
| $ | 0.550 | 100,000 | 100,000 | 1.99 | ||||||||||
| $ | 0.630 | 300,000 | 300,000 | 3.25 | ||||||||||
| $ | 0.770 | 300,000 | - | 4.25 | ||||||||||
| $ | 0.900 | 200,000 | - | 4.62 | ||||||||||
| $ | 0.950 | 50,000 | - | 4.25 | ||||||||||
| $ | 2.320 | 300,000 | - | 4.95 | ||||||||||
| $ | 2.500 | 100,000 | - | 4.91 | ||||||||||
| $ | 2.650 | 200,000 | - | 4.99 | ||||||||||
| 6,100,000 | 4,800,000 | |||||||||||||
| Exercise Price | Shares Under Option | Remaining | ||||||||||||
| per Share | Outstanding | Exercisable | Life in Years | |||||||||||
| $ | 0.080 | 100,000 | 100,000 | 0.72 | ||||||||||
| $ | 0.130 | 200,000 | 200,000 | 1.25 | ||||||||||
| $ | 0.140 | 100,000 | 100,000 | 1.75 | ||||||||||
| $ | 0.140 | 550,000 | 550,000 | 1.76 | ||||||||||
| $ | 0.150 | 1,000,000 | 1,000,000 | 0.50 | ||||||||||
| $ | 0.250 | 1,000,000 | 1,000,000 | 0.50 | ||||||||||
| $ | 0.330 | 50,000 | 50,000 | 1.94 | ||||||||||
| $ | 0.350 | 1,000,000 | 1,000,000 | 0.50 | ||||||||||
| $ | 0.450 | 190,000 | 190,000 | 2.51 | ||||||||||
| $ | 0.550 | 100,000 | 100,000 | 1.50 | ||||||||||
| $ | 0.550 | 20,000 | 20,000 | 1.77 | ||||||||||
| $ | 0.630 | 300,000 | 300,000 | 2.76 | ||||||||||
| $ | 0.770 | 200,000 | 200,000 | 3.76 | ||||||||||
| $ | 0.900 | 050,000 | 50,000 | 4.12 | ||||||||||
| $ | 0.950 | 50,000 | 10,000 | 3.76 | ||||||||||
| $ | 2.320 | 300,000 | 60,000 | 4.45 | ||||||||||
| $ | 2.450 | 2,000,000 | 2,000,000 | 3.73 | ||||||||||
| $ | 2.500 | 100,000 | 25,000 | 4.41 | ||||||||||
| $ | 2.650 | 200,000 | 50,000 | 4.49 | ||||||||||
| $ | 2.850 | 75,000 | - | 3.70 | ||||||||||
| $ | 2.850 | 100,000 | - | 4.70 | ||||||||||
| $ | 3.000 | 25,000 | - | 4.72 | ||||||||||
| $ | 3.725 | 200,000 | - | 4.70 | ||||||||||
| 7,9100,000 | 7,005,000 | |||||||||||||
NOTE 1015 – WARRANTS
During the nine months ended September 30, 2018 and 2017, the Company issued warrants to purchase 7,209,974 and 1,189,280 shares of common stock, respectively, at exercise prices ranging from $0.30 to $4.30 per share in 2018 and $0.40 to $0.62 per share in 2017. These warrants generally expire three or five years from issuance date. The Company recorded the fair value of these warrants, based on the market value of the Company’s common stock on the issuance dates, of approximately $14,237,000 in 2018 and $344,000 in 2017.
During the ninethree months ended September 30,March 31, 2018, the Company issued five-year warrants to purchase 200,000 shares of common stock at an exercise price of $1.15 per share. The entire fair value of these warrants on the issuance date of approximately $206,000 was amortized during the period. No warrants were issued during the three months ended March 31, 2019.
During the three months ended March 31, 2019 and 2018, warrants to purchase 2,057,46222,000 and 89,614 shares of common stock, respectively, were exercised at exercise prices ranging from $0.10$0.50 to $0.50$0.90 per share. No warrants were exercised during the same periodshare in 2017.2019 and $0.20 to $0.40 per share in 2018.
At September 30,March 31, 2019 and 2018, warrants to purchase 9,397,82310,584,211 and 4,355,697 shares of common stock, respectively, were outstanding at exercise prices ranging from $0.12 to $4.30$5.50 per share.share in 2019 and $0.10 to $1.15 per share in 2018.
NOTE 16 – REVENUES
For the three months ended March 31, 2019 and 2018, the Company’s revenues were comprised of the following major categories:
| Three months ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Real estate | $ | 1,666,563 | $ | 1,023,220 | ||||
| Management | 425,648 | 352,742 | ||||||
| Supply procurement | 1,146,033 | 626,924 | ||||||
| Licensing | 258,553 | 80,064 | ||||||
| Other | 19,018 | - | ||||||
| Total revenues | $ | 3,515,815 | $ | 2,082,950 | ||||
Revenue from two clients represented 82% and 78% of total revenues for three months ended March 31, 2019 and 2018, respectively.
NOTE 1117 – RELATED PARTY TRANSACTIONS
As disclosed inNote 3 above, –Acquisitions, the current CEO and CFO of the Company arewere part of the Sigal Ownership Groupownership group from whom Sigal Consulting LLC was acquired in May 2014. The 49% ownership in the Company’s subsidiary, MariMed Advisors Inc., which the Sigal Ownership Groupthis ownership group acquired as part of the purchase price, was acquired by the Company from the Sigal Ownership Groupthis ownership group in June 2017 in exchange for 75 million shares of the Company’s common stock.
In October 2017, the Company acquired the intellectual property, formulations, recipes, proprietary equipment, and know-howcertain assets of the Betty’s Eddies™ brand of cannabis-infused products, as disclosed inNote 3 –Acquisitions, from a company that is minority-owned by the Company’s chief operating officer.
In December 2017 and January 2018, options to purchase 400,000 shares of commons stock at an exercise price of $0.025 were forfeited by the CEO and by an independent board member (200,000 shares forfeited by each individual).
In January 2018, the Company granted options to purchase 1.45 million shares of common stock to the Company’s board members at exercise prices ranging from $0.14 to $0.77 and expiring between December 2020 and December 2022, as disclose in Note 9. Also during this month,2022. The fair value of these options on grant date of approximately $458,000 was amortized over the CEO and a board member each forfeited options to purchase 100,000 shares of common stock.six-month vesting period.
DuringThe Company’s current corporate offices are leased from a company owned by a related party under a 10-year lease that commenced August 2018 and contains a five-year extension option. Previous to this lease, the nineCompany’s former corporate offices were also leased from a company owned by a related party. For the three months ended September 30,March 31, 2019 and 2018, a current board member exercised options to purchase 400,000 shares of common stock,expenses incurred under these leases approximated $34,000 and the former CFO of the Company exercised options to purchase 300,000 shares of common stock. These options were exercised at exercise prices ranging from $0.08 to $0.63 per share. During the same period ended September 30, 2017, as disclosed in Notes 8 and 9, options to purchase 4.5 million shares of common stock were exercised by the former CEO of the Company, who is a currently a board member, at an exercise price of $0.01 per share.$6,000, respectively.
DuringThe outstandingDue To Related Partiesbalances at March 31, 2019 and December 31, 2018 of approximately $220,000 and $276,000, respectively, were comprised of amounts owed of approximately (i) $81,000 in both periods to the nine months ended September 30, 2018Company’s CEO and 2017, the Company issued 170,000CFO, (ii) $79,000 and 202,541 shares,$135,000, respectively, of common stock for services renderedto two companies partially owned by the former CFOthese officers, and (iii) $60,000, in both periods to two shareholders 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 2018Such amounts owed are not subject to repayment schedules and $31,000 in 2017.are expected to be repaid during 2019.
At September 30, 2018The outstandingDue From Related Partiesbalance at March 31, 2019 and December 31, 2017, the Company owed an aggregate2018 of approximately $33,000$120,000 and $121,000 was comprised of an advance of to a company partially owned by the Company’s CEO and CFO.
The captionDue from Related Parties This amount is expected to be repaid in the Company’s financial statements is primarily comprised of short-term loans to non-consolidated entities under common ownership.2019.
The captionDue to Related Parties reflects short term loans from related parties and includes advances received from officers of the Company.
| 26 |
NOTE 1218 –COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company is the lessee under five operating leases and one finance lease. These leases contain rent holidays and customary escalations of lease payments for the type of facilities being leased. The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods which the Company fully expects to exercise. Certain leases require the payment of property taxes, insurance and/or maintenance costs in addition to the rent payments.
The details of the Company’s operating lease agreements are as follows:
| ● | Delaware – 4,000 square feet of retail space in a multi-use building under a five-year lease that commenced in October 2016 and contains a five-year option to extend the term. The Company developed the space into a cannabis dispensary which is subleased to its cannabis-licensed client. | |
| ● | Delaware – a 100,000 square foot warehouse leased in March 2019 that the Company intends to construct into a cultivation and processing facility to be subleased to the same Delaware client. The lease term is 10 years, with an option to extend the term for three additional five-year periods. | |
| ● | Nevada – 10,000 square feet of an industrial building that the Company has built-out into a cannabis cultivation facility and plans to rent to its cannabis-licensed client under a sub-lease which will be coterminous with this lease expiring in 2024. | |
| ● | Massachusetts – 10,000 square feet of office space which the Company utilizes as its corporate offices under a 10-year lease with a related party expiring in 2028 which contain a 5-year extension option. | |
| ● | Maryland – a 2,700 square foot 2-unit apartment under a lease that expires in July 2020 with an option to renew for a two-year term. |
The Company leases machinery under a finance lease that expires in February 2022 with such term being a major part of the economic useful life of the machinery.
The components of lease expense for the three months ended March 31, 2019 were as follows:
| Operating lease cost | $ | 93,015 | ||
| Finance lease cost: | ||||
| Amortization of right-of-use assets | $ | 2,053 | ||
| Interest on lease liabilities | 420 | |||
| Total finance lease cost | $ | 2,473 |
The weighted average remaining lease term for operating leases is 9.9 years, and for the finance lease is 3.3 years. The weighted average discount rate used to determine the right-of-use assets and lease liabilities was 7.5% for all leases.
Future minimum lease payments as of March 31, 2019 under all non-cancelable operating leases having an initial or remaining term of more than one year were:
Operating Leases | Finance Lease | |||||||
| 2019 | $ | 320,069 | $ | 9,496 | ||||
| 2020 | 917,444 | 12,661 | ||||||
| 2021 | 1,008,227 | 12,661 | ||||||
| 2022 | 949,935 | 1,371 | ||||||
| 2023 | 910,166 | - | ||||||
| Thereafter | 5,139,851 | - | ||||||
| Total lease payments | 9,245,292 | $ | 36,189 | |||||
| Less: imputed interest | (2,963,703 | ) | (3,708 | ) | ||||
| $ | 6,281,589 | $ | 32,481 | |||||
Terminated Employment Agreement
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 recordedmaintained an accrual of approximately $1,043,000 at September 30, 2018March 31, 2019 and December 31, 20172018 for any amounts that may be owed under this agreement. However,agreement, although the Company contends that such agreement is contesting the validity this agreement.not valid.
NOTE 13 – SEGMENT REPORTING
In accordance with ASC 280, the following is information regarding the Company’s operating segments:
| Nine Months Ended September 30, | ||||||||
| 2018 | 2017 | |||||||
| Revenues: | ||||||||
| Online portal operations | $ | — | $ | 289 | ||||
| Cannabis related operations | 8,411,858 | 4,487,184 | ||||||
| Consolidated revenues | $ | 8,411,858 | $ | 4,487,473 | ||||
| Depreciation: | ||||||||
| Online portal operations | $ | — | $ | — | ||||
| Cannabis related operations | 445,504 | 263,624 | ||||||
| Depreciation | $ | 445,504 | $ | 263,624 | ||||
| Net income (loss): | ||||||||
| Online portal operations | $ | (207 | ) | $ | (31,903 | ) | ||
| Cannabis related operations | (18,221,440 | ) | 331,864 | |||||
| Net income (loss) | $ | (18,221,647 | ) | $ | 300,161 | |||
| Capital expenditures: | ||||||||
| Online portal operations | $ | — | $ | — | ||||
| Cannabis related operations | 7,259,413 | 11,502,688 | ||||||
| Combined capital expenditures | $ | 7,259,413 | $ | 11,502,688 | ||||
| Assets: | ||||||||
| Online portal operations | $ | 1,191 | $ | 1,476 | ||||
| Cannabis related operations | 57,132,308 | 21,370,942 | ||||||
| Combined assets | $ | 57,133,499 | $ | 21,372,418 | ||||
NOTE 1419 – SUBSEQUENT EVENTS
Notes ReceivableDebentures Payable Conversion
In October and November 2018,April 2019, the Company purchased an additional $23.25 million of GC Debentures, at which time the Company entered into a Subscription Agreement for Convertible Debentures (the “SA”) with GenCanna governing the aggregate GC Debentures purchased of $30 million. The SA maintains the provisionsHolder of the $6.75M$10M Debentures converted $500,000 of GC Debentures previously purchased as of September 30, 2018 and disclosed in Note 4. Additionally, among other provisions, the Company shall have the right to appoint one director to GenCanna’s board, and shall fund a $10 million employee bonus pool should GenCanna meet certain 2019 operating targets.
Pursuant to a Security and Pledge Agreement executed with GenCanna in November 2018, the Company was granted a senior security interest on certain assets of GenCanna equal in value to 100% or more of the principal and approximately $70,000 of accrued interest on the GC Debentures until such time the GC Debentures are paid down, redeemed or converted. Additionally, the Company was granted certain other rights, pursuant to a Rights Agreement, including rightsinto 211,015 shares of inspection, financial information,common stock at conversion prices of $2.67 and participation in future security offerings of GenCanna.$2.74 per share.
Conversion of the Company’s entire $30 million investment shall equate to at least a 33.3% ownership interest in GenCanna on a fully diluted basis.
Debt Issuance
In October and November 2018, pursuant to the terms of a Securities Purchase Agreement (the “SPA”),May 2019, the Company sold an aggregateadditional $5,000,000 of $10,000,000 convertible debentures bearing interest at the rate of 6% per annum that mature threetwo years from issuance, with a 1% issue discount, resulting in net proceeds to the Company of $9,900,000$4,950,000 (the “$10M5M Debentures”).
The holder of the $10M$5M Debentures (the “Holder”) shall have the right at any time to convert all or a portion of the $10M Debenture, along with accrued and unpaid interest, into the Company’s common stock at conversion prices equal to 80% of a calculated average, as determined in the $10M Debentures, of the daily volume-weighted price during the ten consecutive trading days preceding the date of conversion. Notwithstanding this conversion right, the Holder shall limit conversions in any given month to certain agreed-upon values based on the conversion price, and the Holder shall also be limited from beneficially owning more than 4.99% of the Company’s outstanding common stock (potentially further limiting the Holder’s conversion right).
The Company shall have the right to redeem all or a portion of the $10M Debentures, along with accrued and unpaid interest, at a 10% premium, provided however that the Company first provide advance written noticewere sold to the Holder of its intention to make a redemption, with the Holder allowed to affect one or more conversions$10M Debentures. The terms of the $10M Debentures during such notice period.
Upon a change in control transaction, as defined in the $10M Debentures, the Holder may require the Company to redeem all or a portion of the $10M Debentures at a price equal to 110% of the principal amount of the $10M Debentures plus all accrued and unpaid interest thereon. So long as the $10M$5M Debentures are outstanding, in the event the Company enters into a Variable Rate Transaction (“VRT”), as defined in the SPA, the Holder may cause the Company to reviseconsistent with the terms of the $10M Debentures to matchas described inNote 12 – Debentures Payable, with small variations, most notably a cap on the terms of the convertible security of such VRT. As part of issuance of the $10M Debenture, theconversion price. The Company also issued three-year warrants to the Holder to purchase 324,675400,000 shares of common stock at exercise prices of $3.50 and $5.50 per share (the “Warrants”).
Pursuant to the terms of a Registration Rights Agreement with the Holder, entered into concurrently with the SPA and the $10M Debentures, the Company agreed to provide the Holder with customary registration rights with respect to any potential shares issued pursuant to the terms of the SPA, the $10M Debentures, and the Warrants.
Acquisitions
In October 2018, the Company entered into a purchase agreement to acquire 100% of the ownership interests of KPG of Anna LLC and KPG of Harrisburg LLC, the Company’s two cannabis-licensed clients that operate medical marijuana dispensaries in the state of Illinois (both entities collectively, the “KPGs”), from the current ownership group of the KPGs (the “Sellers”). As part of this transaction, the Company will also acquire the Sellers’ ownership interests of Mari Holdings IL LLC, the Company’s subsidiary which owns the real estate in which the KPGs’ dispensaries are located (“Mari-IL”). The purchase price of 1,000,000 shares of the Company’s common stock shall be issued to the Sellers upon the closing of the transaction, which is dependent upon, among other closing conditions, the approval by the Illinois Department of Financial and Professional Regulation. After the transaction is effectuated, the KPGs and Mari-IL will be wholly-owned subsidiaries of the Company.
In October 2018, the Company’s cannabis-licensed client in Massachusetts, ARL Healthcare Inc. (“ARL”), filed a plan of entity conversion with the state to convert from a non-profit entity to a for-profit corporation. ARL holds three cannabis licenses from the state of Massachusetts for the cultivation, production and dispensing of cannabis. Upon approval of the conversion plan by the state, the Company shall be the sole shareholder of ARL, and shall elect its current COO to serve as ARL’s sole board member.
As of September 30, 2018, the Company had not yet received the legislative approval that is required for all ownership changes of cannabis licensees, and therefore the operations of the KPGs and ARL were not consolidated in the Company’s financial statements as of such date. The Company anticipates that approval for these transactions will be obtained, and those deals consummated, prior to the end of the current fiscal year, or in early 2019. When that occurs, the Company will consolidate the acquired entities in accordance with GAAP.
In October 2018, the Company acquired BSC Group LLC, a multidisciplinary advisory firm that provides operational, marketing, and licensing management services to companies within the cannabis industry.
Equity Transactions
In October 2018, the Company (i) sold 4,999,242 shares of common stock at prices of $2.20 and $3.00 per share, resulting in total proceeds of $14,925,000, and (ii) issued three-year warrants to purchase 1,201,163 shares of common stock at exercise prices ranging from $3.50 to $5.50 per share.
In October 2018, warrants to purchase 222,775 shares of common stock were exercised at exercise prices ranging from $0.40 to $1.75 per share, and options to purchase 60,000 shares of common stock were exercised at an exercise price of $0.45$4.00 per share in a cashless transaction.share.
Seed Inventory Purchases
In April 2019, Mari-Hemp purchased an additional $3.5 million of industrial hemp seeds for wholesale hemp distribution and hemp-derived CBD product development.
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Item 2. Management’s Discussions and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
When used in this form 10-Q and in future filings by the Company with the Commission, the words or phrases such as “anticipate,” “believe,” “could,” “should,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. These factors include, but are not limited to, changes that may occur to general economic and business conditions; changes in current pricing levels that we can charge for our services or which we pay to our suppliers and business partners; changes in political, social and economic conditions in the jurisdictions in which we operate; changes to laws and regulations that pertain to our products and operations; and increased competition.
The following discussion should be read in conjunction with the unaudited financial statements and related notes which are included under Item 1.
We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.
Overview
General
MariMed Inc. (“we”, “our”, “us”, “MariMed”, or the “Company”) is a leader in the emerging legal cannabis and hemp industries. During 2018, the Company made a strategic decision to transition from a professional management and advisory company that provides cannabis licensing, operational consulting, and real estate services, to a direct owner of cannabis licenses and operator of seed-to-sale operations.
The Company’s stock is quoted on the OTCQB market under the ticker symbol MRMD.
The Company currently provides ongoing management oversight or real estate services to five independent operations in five states – Delaware, Illinois, Maryland, Nevada, and Rhode Island. In Massachusetts the Company successfully converted its cannabis-licensed client, from a non-profit entity to a for-profit corporation with the Company as the sole shareholder, as described in further detail below. Since entering the cannabis industry, the Company has demonstrated an excellent track record in managing state-of-the-art, regulatory-compliant facilities for the cultivation, production, and dispensing of legal cannabis and cannabis-infused products.
We are industry experts in the development, operation, management and optimization of cannabis cultivation, production, and dispensing facilities. Such facilities, located in multiple states, are leased to the Company’s clients in the emerging cannabis industry. Our team acquires land and/or real estate for the purpose of developing state-of-the-art, regulatory-compliant legal cannabis facilities. These facilities are models of excellence in horticultural principals, cannabis production, product development, and dispensary operations. These facilities are leased to the Company’s clients who are entities that have been awarded legal and medical marijuana licenses from multiple states. Along with this operational oversight, the Company provides its clients with legal, accounting, human resources, and other corporate and administrative services.
The Company also provides industry leading expertise and consultative services in all aspects of cannabis licensing procurement. To date, the Company has secured, on behalf of its clients, 11 cannabis licenses across five states—two in Delaware, two in Illinois, one in Nevada, three in Maryland and three in Massachusetts. Accordingly, we have operating facilities locatedopen or under development in the cities of Wilmington, Lewes, and LewesMilford in Delaware; the cities of Anna and Harrisburg in Illinois; Clark county in Nevada; Arundel county and the city of Hagerstown in Maryland; and the cities of New Bedford, Norwood and Middleborough in Massachusetts. In total, we have developed in excess of 300,000 square feet of seed-to-sale cannabis facilities.
It is the Company’s plan to ultimately consolidate the ownership of the five remaining operating entities under the MariMed banner. The Company has started the consolidation process which is at various stages of completion due to the respective state laws governing cannabis license ownership. Once the consolidation is completed, the Company will own, manage, and operate cultivation, manufacturing and retail dispensary operations in these states. Moreover, the Company plans to leverage its success of providing management oversight in these markets to expand into other states, while focusing on regulatory compliance, efficiency and product performance.
Recognizing the emergence of the global hemp market, in late 2018, the Company purchased $30 million of subordinated secured convertible debentures (the “GC Debentures”) from GenCanna Global Inc., a leading producer and distributor of agricultural hemp, cannabidiol (“CBD”) formulations, and hemp genetics (“GenCanna”). In February 2019, the Company converted the GC Debentures plus accrued interest through the conversion date into a 33.5% ownership interest in GenCanna on a fully diluted basis. Additionally, the Company established a wholly-owned subsidiary, MariMed Hemp Inc. in January 2019 to market and distribute hemp-derived CBD products across several vertical markets.
In addition, to our cannabis facilities, we are on the forefront of the development ofCompany has developed precision-dosed cannabis-infused products. Our proprietary branded products are comprised of Kalm Fusion™, designed for the treatment of specific medical conditions and related symptoms,symptoms. These products are licensed under Company-owned brands such as Kalm Fusion™, Betty’s Eddies™, the recently acquired recreational-leaning brand of fruit chews, and Nature’s Heritage™, in the newest memberform of dissolvable strips, tablets, powders, microwaveable popcorn, fruit chews, and with more varieties in development. The Company also sublicenses several top brands including Lucid Mood™ disposable vape pens, Vitiprints™ printable dissolvable discs, and DabTabs™ revolutionary vaporization tablets infused with cannabis concentrates. The Company plans to continue licensing the MariMed familybest brands and products in the industry for distribution through its owned and client-leased dispensaries, as well as to other licensed producers in thousands of dispensaries across the country.
Over its short history, the Company has developed an excellent reputation for strong management in the cannabis industry. As a management company, MariMed’s clients have thrived and succeeded in their respective markets. The Company’s goal is to continue this success as it transitions from a manager and advisor to an owner of cannabis licenses and operator of cannabis businesses. The Company’s strengths can be summarized as follows:
Professional Management
We have had considerable success writing award-winning applications for clients applying for licenses in new and established legal cannabis states; creating and developing defined business, operating and security plans; sourcing real estate for cannabis facilities in receptive municipalities; and raising capital to purchase and develop facilities. These skills are important as the Company expands its footprint into new states on a direct ownership basis.
Development of State-of-the-Art Cannabis Facilities and Operations
We have constructed numerous cannabis facilities in several states utilizing and developing industry “best practices” in all of our facilities, and our clients’ seed-to-sale operations in multiple states are examples of operational excellence under our proven management processes and practices.
Cannabis Brand Creation
We have developed unique brands consisting of organicprecision-dosed cannabis-infused products created fromwhich are currently licensed and distributed in cannabis-legal states. Going forward, the finest seed lineagesCompany intends to continue expanding both its brand portfolio and the licensing of its branded products into additional states.
Investment in Hemp Production
Our direct ownership in GenCanna, which we believe will become one of the largest hemp producers in the United States by the year 2020, will help ensure the Company has access to a safe and reliable source of hemp-based CBD. The market for hemp-based CBD products is expected to grow significantly over the next several years;
Technological and Scientific Innovation
We are “The bestdiligent in identifying and reviewing the latest sciences and processes applicable to the cultivation, distillation, production, packaging, securing, and distribution of cannabis Mother Earthand cannabis-infused products. We have obtained the highest quality cannabis strains and genetics. We are at the leading edge of patient education and physician outreach for cannabis, and we seek strategic relationships with companies that are at the forefront of extraction and distillation.
Consolidation Plans
The Company’s strategic shift involves the acquisition of the business operations and licenses of entities to which the Company provides advisory and real estate services. The following is an overview of the consolidation process:
Massachusetts
The Company successfully converted ARL Healthcare Inc. (“ARL”), its cannabis-licensed client, from a non-profit entity to a for-profit corporation with the Company as the sole shareholder. The Company now owns ARL and its cannabis licenses for cannabis cultivation, production and dispensing, with rights for up to nine statewide locations in both the medical and adult-use programs. The Company has recently completed construction of a 70,000 square foot state-of-the-art cultivation and production facility for ARL in New Bedford within the Company’s 138,000 square foot facility purchased in 2017. ARL’s manufactured cannabis products will be sold to offer®”.licensed dispensaries throughout the state serving both the medical and adult-use markets.
The Company also owns a 22,700 square foot building in Middleborough in which a 10,000 square foot dispensary is planned to be open for business in May 2019. Furthermore, the Company intends to open two more dispensaries in the Boston area in 2019.
Maryland
In December 2018, the Company entered into a memorandum of understanding to acquire Kind Therapeutics USA Inc. (“Kind”), its cannabis-licensed client that holds licenses for the cultivation, production, and dispensing of medical cannabis. The parties are finalizing a merger document to effectuate the transaction which is conditioned on the approval by the Maryland Medical Cannabis Commission, which is expected to occur in October 2019. Until then, the Company will continue to provide management and operational advisory services to Kind, whose operations are conducted within a 100,000 square foot cultivation and manufacturing facility within a Company-owed 180,000 square foot industrial building in Hagerstown. The large production capacity of this facility will enable the Company to take full advantage of a robust Maryland market consisting of over 100 planned dispensaries, most of which are not attached to a specific cultivator. Additionally, the Company has exclusive sublicensing rightscontracted to purchase a 9,000 square foot building in certainAnne Arundel County for the development of a dispensary, currently scheduled to open in late 2019.
Illinois
In October 2018, the Company entered into a purchase agreement to acquire the ownership interests of KPG of Anna LLC and KPG of Harrisburg LLC, the Company’s two cannabis-licensed clients that operate Company-built and owned medical marijuana dispensaries in the state of Illinois (both entities collectively, the “KPGs”), from the current ownership group of the KPGs. As part of this transaction, the Company will also acquire this ownership group’s interests in Mari Holdings IL LLC, the Company’s subsidiary which owns the real estate in which the KPGs’ dispensaries are located. The Company is currently awaiting approval for this transaction from the state, which is expected to be received in the near future. Additionally, the state is in the process of legalizing adult-use cannabis and will permit the Company to expand into two additional locations when such legalization occurs.
Nevada
In November 2018, the Company contracted to acquire 100% of the ownership interests of The Harvest Foundation LLC, the Company’s cannabis-licensed client in the state of Nevada (“Harvest”). The acquisition is conditioned upon the approval of the state cannabis commission which is in process. Harvest holds both medical and adult-use cannabis 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 currently is a not-for-profit state with regard to the ownership of cannabis licenses. The Company provides comprehensive management and real estate services to First State Compassion Center (“FSCC”), the Company’s cannabis-licensed client which was awarded Delaware’s first ever seed-to-sale medical cannabis license, and owns two out of the four statewide licenses.
FSCC operates out of a Company-owned 47,000 square foot seed-to-sale facility in Wilmington, and a Company-leased 4,000 square foot retail location in Lewes. The Company has recently signed a lease with an option to purchase a 100,000 square foot building in Milford, with plans to build another cultivation and production facility to serve the state’s growing patient count.
The state is expected to allow “for-profit” ownership of cannabis licenses in the near future, at which time the Company will look to acquire FSCC and obtain ownership of the licenses and operations
Rhode Island
Rhode Island currently is a not-for-profit state with regard to the ownership of cannabis licenses. The Company is in negotiations to purchase the real estate which is leased to its cannabis-licensed client, the Thomas C. Slater Compassion Center (“Slater”), and to acquire, subject to state approval, the management company that oversees Slater’s operations. After these transactions are completed, the Company will generate real estate and management fees until the state allows “for-profit” ownership, which is expected to occur in 2020. At that time, the Company will seek to acquire Slater’s cannabis licenses and operations.
New Operations – Completed Transactions & Current Activities
GenCanna Global Inc.
In late 2018, the Company purchased the GC Debentures from GenCanna. In February 2019, the Company converted the GC Debentures plus accrued interest through the conversion date into common shares of GenCanna representing a 33.5% ownership interest in GenCanna on a fully diluted basis, and our CEO, Robert Fireman was appointed to GenCanna’s board of directors.
In December 2018, the 2018 Farm Bill (the “Farm Bill”) became law in the United States. Under the Farm Bill, industrial and commercial hemp is no longer classified as a Schedule I controlled substance, and explicitly allows interstate hemp commerce which will enable its legal transport and delivery across state lines.
GenCanna, based in Winchester, Kentucky, focuses on growing hemp with superior genetics and creating hemp-based products in accordance with the highest quality standards such as GMP (Good Manufacturing Practices) to ensure that wholesalers and consumers receive a consistent high-quality product to meet their wellness needs. GenCanna has also become a thought leader in the hemp industry, working closely with federal and local governmental regulatory authorities.
During the 2018 growing season, GenCanna had nearly 1,000 acres under contract and expects to increase that number significantly in 2019 in order to meet the growing demand for hemp-derived CBD. GenCanna is currently undertaking a major facility expansion in Kentucky in order to accommodate the rapid increase in production from the considerable increase in hemp acreage.
MariMed Hemp
To optimize its investment in GenCanna, the Company established MariMed Hemp Inc. in January 2019, 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. This entity is expected to offer a unique product line of high-quality hemp-based CBD wellness products eligible for distribution in all 50 states and reach a new customer base outside of the licensed-cannabis channel. This expansion into hemp-based CBD products reflects a growing consumer appetite for overall health and wellness products, and specifically those products which are CBD-based.
The rapid growth of legal cannabis and hemp-derived CBD markets presents a global paradigm shift and challenges to distribute vaporizer pensmedical professionals and consumers who seek scientific knowledge and research regarding medical cannabis and hemp. Accordingly, in addition to the aforementioned objectives, one of MariMed Hemp’s priorities will be to provide credible research-based information about the health benefits of cannabis and hemp to medical providers and their patients, many of whom express a strong and growing appetite for knowledge on this topic. Armed with this knowledge, such healthcare professionals and consumers will be able to effectively and safely choose from a broad, and potentially confusing, range of cannabis products.
As part of its education initiative, the Company is assembling a Scientific Advisory Board (the “SAB”), that includes some of the world’s leading scientists and researchers focused on the scientific application of cannabis and hemp for health and wellness. The SAB’s goals will include the development of strategies to address the most widespread and debilitating medical and dietary conditions through the utilization of cannabis- and hemp-based therapies.
Meditaurus
To facilitate our drive for greater science and education, the Company entered into an agreement in February 2019 to acquire a 70% interest in Meditaurus LLC. Meditaurus was established by Dr. Jokubas Ziburkas, a leading authority on hemp-based CBD and the endocannabinoid system. Dr. Ziburkas holds a PhD in Neuroscience, and currently serves as Associate Professor of Neuroscience at the University of Houston, where his research focused on cannabinoid actions in the brain and novel treatments for neurological disorders. He has published over 20 peer-reviewed articles and book chapters, and is regarded as a thought leader in the global cannabis industry.
Meditaurus has developed by Lucid Mood™,proprietary formulations for hemp-derived CBD, and currently operates in Lithuania and Texas. ItsFlorancebrand, recently launched in Germany, is marketed globally on their website. This transaction includes the commitment of Dr. Ziburkas to become the Chief Innovation Officer of MariMed, and to assist MariMed Hemp Inc. in the marketing and distribution ofFloranceand newly-developed products throughout the United States and Europe.
Pipeline Transactions
MariMed is actively pursuing other growth opportunities to expand its asset portfolio in the medical and adult-use cannabis industries. While no assurance can be given that any of these opportunities will materialize, the Company is currently in various stages of dialog to invest in or acquire several domestic and foreign entities, along with such entities’ licenses, brands and operations.
We are not disclosing the details of these pipeline transactions in order to maintain confidentiality. We will disclose such transactions when they are consummated.
Corporate History
The Company was originally incorporated in the state of Delaware in January 2011 as a wholly-owned subsidiary of Worlds Inc. (formerly Worlds.com Inc.) under the name Worlds Online Inc. In May 2011, Worlds Inc. commenced the spin-off of the Company, which was consummated after Securities and Exchange Commission (“SEC”) review in May 2012.
The Company’s initial ticker symbol was WORX, and since inception, the Company has operated an online portal that offers multi-user virtual environments to users. Over time, however, this business model declined, and consequently it has had insignificant operating activity since 2014. All of the underlying patents as well as the clinically-tested medicinal cannabis strains developed in Israel by world-renowned Tikun Olam™. The Company continuesCompany’s license agreement from Worlds Inc. with respect thereto have expired, and we do not expect to be committedengaged in this business.
In early 2014, the Company transitioned its operational focus to the licensing and distribution of brandedemerging cannabis productsindustry. In order to quickly gain traction into this new space, in states acrossMay 2014, the country and beyond.Company, through its wholly-owned subsidiary MariMed Advisors Inc., acquired Sigal Consulting LLC (“Sigal”), a company operating in the cannabis industry.
AsThe purchase price paid to the former owners of this filing, we have begunSigal consisted of (i) an aggregate amount of the Company’s common stock equal to execute50% of the outstanding shares on our strategythe closing date of September 29, 2014, (ii) options to evolvepurchase 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.
During the first half of calendar 2017, the Company into a direct cultivator, producer,changed its name to MariMed Inc. and dispenserits ticker symbol to MRMD. Also during this time, the number of cannabisauthorized shares of the Company’s common and cannabis-related products, which we anticipate will significantly increase our revenues, profitabilitypreferred stock were increased to 500 million and overall operations. The following paragraphs highlight our efforts to date, which include50 million, respectively, and the progress made on our recently announced strategic initiative to consolidateCompany purchased the operationsremaining 49% interest in MariMed Advisors Inc. in exchange for 75 million shares of our cannabis-licensed clientscommon stock.
In July 2017, Robert Fireman was named as the Company’s CEO and to acquire cannabis licensees inPresident, 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 states.certain assets of the Betty’s Eddies™ brand of cannabis-infused fruit chews.
In May 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 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 Pennsylvania license from the state of Pennsylvania for the cultivation of cannabis (“AgriMed”). AgriMed presently developsand cannabis products that arecan be wholesaled to medical marijuana dispensaries within the state. As required by state law, andIn February 2019, the Company filed a complaint against AgriMed for specific performance of their obligations under the purchase agreement. The parties are currently in orderdiscussions to effectuate the transaction, the parties have applied for legislative approval of the change in AgriMed’s ownership with respect to the Company’s acquisition, and are expecting receipt of written evidence thereof prior the end of the 2018 fiscal year.resolve this matter.
In August 2018, the Company entered intopurchased a 23% ownership interest in CVP Worldwide LLC d/b/a Sprout, an entity that provides a customer relationship management and marketing platform, branded under the name Sprout, specifically designed for companies in the cannabis industry.
In August 2018, the Company obtained the exclusive global licensing agreement for the production and distribution rightsworldwide license from Vitiprints LLC to sublicense, use, develop, promote, sell or otherwise commercialize in all existing and future legal cannabis markets ofany way a proprietary technology that printsproduces precision-dosed dissolvable cannabis products. This technology facilitates the production ofproducts at multiple combinations of cannabinoids, terpenes, and nutrients, while avoiding fillers commonly found in cannabis and nutraceutical products, into a paper-thin, low-calorie, fast-absorbing product that is delivered sublingually, transdermally, or by drinking when dissolved in liquid. The process also allows for the printing of any graphic, such as a bar code or website address, on each product. These products transport easilyliquid, all at scale and discreetly in purses, pockets, and wallets, and are produced at higher levels of efficiency than the current methods within the cannabis industry.
In August 2018, the Company made a strategic investment in an entity that provides a customer relationship management and marketing platform specifically designed for companies in the cannabis industry (“Sprout”). The Company shall assist in the ongoing development and design of Sprout, and in marketing Sprout to companies within the cannabis industry.exceedingly reduced cost.
During the period September 2018 to November 2018, pursuant toin a subscription agreement,series of investments, the Company purchased an aggregate of $30 million of subordinated secured convertible debentures (the “GC Debentures”) of GenCanna Global, Inc., a producer and distributor of agricultural hemp, cannabidiol (CBD) formulations, hemp genetics, and hemp products (“GenCanna”). The GC Debentures bear interest at a compounded rate of 9% per annum and mature three years from issuance. The GC Debentures are convertible into the common stock of GenCanna, at the Company’s option, (i) upon the occurrence of a Liquidity Event, as defined in the GC Debentures, or (ii) after December 31, 2018, upon ten days prior written notice to GenCanna. The conversion price shall be the lesser of a 20% discount to the price of the Liquidity Event, or the price based on a defined post-money valuation of GenCanna. TheIn February 2019, the Company was granted a senior security interest on certain assets of GenCanna equal in value to 100% or more ofconverted the principal anddebentures plus accrued interest onthrough the GC Debentures. Additionally, the Company was granted certain other rights including rights of inspection, financial information, and participation in future security offerings of GenCanna. Conversion of the entire $30 million investment shall equate to at leastconversion date into a 33.3% ownership33.5% equity interest in GenCanna on a fully diluted basis.
In October 2018, the Company entered into a purchase agreement to acquire 100% of the ownership interests of KPG of Anna LLC and KPG of Harrisburg LLC, the Company’s two cannabis-licensed clients that operate medical marijuana dispensaries in the state of Illinois (both entities collectively, the “KPGs”), from the current ownership group of the KPGs (the “Sellers”). As part of this transaction, the Company will also acquire the Sellers’ ownershipremaining minority interests of Mari Holdings IL LLC, the Company’s subsidiary whichthat owns the real estate in whichwhere the KPGs’ two dispensaries are located, (“Mari-IL”).from the KPGs’ current ownership group. The purchase price of 1,000,000 shares of the Company’s common stock shall be issued to the Sellers upon the closingparties are currently awaiting state approval of the transaction which is dependent upon, among other closing conditions, the approval by the Illinois Department of Financial and Professional Regulation. After the transaction is effectuated, the KPGs and Mari-IL willexpected to be wholly-owned subsidiaries of the Company.received in April 2019.
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. UponIn November 2018, the Company received written confirmation of state approval of the conversion plan byfrom the state, making ARL a wholly-owned subsidiary of the Company.
In November 2018, the Company shall beentered into an agreement to acquire The Harvest Foundation LLC, the sole shareholder of ARL, and shall elect its current COO to serve as ARL’s sole board member. As of the date of this filing,Company’s client awarded a cannabis license for cultivation in the state has not finalized it review of the conversion,Nevada. The acquisition is conditional upon state approval which is expected to be approved prior to the end of the 2018 fiscal year.occur in May 2019.
In OctoberDecember 2018, the Company acquired BSC Groupmade a $500,000 investment in Iconic Ventures Inc. which has developed DabTabs™, a revolutionary product that consists of a convenient portable tablet that delivers precise dosing and acts as a storage system for full spectrum cannabinoid vaporization. Additionally, the Company secured the exclusive distribution rights for six states and is in the process of beginning distribution in the state of Maryland.
In December 2018, the Company executed a memorandum of understanding to merge with its cannabis-licensed client in Maryland, Kind Therapeutics LLC. A merger agreement is currently being drafted for this transaction, which is intended to qualify as a tax-deferred reorganization under the Internal Revenue Code. The parties expect the merger agreement to be finalized, and the transaction approved by the state legislature in 2019.
In January 2019, the Company entered into an agreement with Maryland Health & Wellness Center Inc. (“MHWC”), an entity that has been pre-approved for a cannabis dispensing license, to provide MHWC with a construction loan in connection with the buildout of MHWC’s proposed dispensary 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 MWHC. 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 note receivable from Chooze Corp., an entity that develops CBD- and THC-infused products without debilitating side effects, into a 2.7% ownership interest in the entity.
In January 2019, the Company established MariMed Hemp Inc., a wholly-owned subsidiary to develop, market, and distribute hemp-based CBD brands and products, and to provide hemp producers with bulk quantities of hemp genetics and biomass.
In February 2019, the Company converted its $30 million purchase of subordinated secured convertible debentures of GenCanna Global, Inc., a producer and distributor of agricultural hemp, cannabidiol (“CBD”) formulations, hemp genetics, and hemp products into a 33.5% ownership interest.
In February 2019, the Company contracted to purchase a 70% interest in Meditaurus LLC, a multidisciplinary advisory firm that provides operational, marketing,company established by Dr. Jokubas Ziburkas who holds a PhD in neuroscience and licensing management services to companies withinis a leading authority on hemp-based CBD and the cannabis industry.endocannabinoid system. Meditaurus currently operates in the United States and Europe and has developed proprietary CBD formulations sold under itsFlorance brand.
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Revenues
Our revenues are currently comprised of the following primary categories:
Management – We receive fees for providing comprehensive oversight of our clients’ entire cannabis cultivation, production, and dispensary operations. Along with this oversight, we provide human resources, legal, accounting, sales, marketing, and reporting services.
Real Estate – Our state-of-the-art, regulatory-compliant legal cannabis facilities are leased to our cannabis-licensed clients over 20-year lease terms. We generate rental income from occupancy, tenant improvements, equipment rentals, and additional rental income based on the success of the cannabis licensees.
Licensing – We derive licensing revenue from the sale by the licensees of our branded precision-dosed cannabis-infused products, such as Kalm Fusion™ and Betty’s Eddies™, to legal dispensaries throughout the country.
Consulting – We assist third-partiesthird parties in securing cannabis licenses, and provide advisory services in the areas of facility design and development, and cultivation and dispensing best practices
Supply Procurement – We have established large volume discounts with top national vendors of cultivation and production supplies and equipment, which we acquire and resell at competitive prices to our cannabis-licensed clients with a reasonable markup.
Product Sales –We are currently working towards generating revenues from direct sales of cannabis, hemp, and products derived from these plants. Such revenues are anticipated to come from (i) MariMed Hemp’s development of a hemp-derived CBD product line and wholesale hemp distribution business, and (ii) the dispensary and wholesale operations of ARL in Massachusetts and of the Company’s planned cannabis-licensee acquisitions in Pennsylvania, Illinois, Maryland, and Nevada.
Expenses
We classify our expenses into three broad categories:
| ● | cost of revenues, which includes the direct costs associated with the generation of our revenues, and depreciation expense on our properties and equipment; | |
| ● | operating expenses, which include the sub-categories of personnel, marketing and promotion, and general and administrative; and | |
| ● | non-operating income and expenses, which include the sub-categories of interest |
Liquidity and Capital Resources
During the ninethree months ended September 30, 2018,March 31, 2019, we raised approximately $16.9$2.6 million from the issuance of common stock, and $3.0$6.0 million from the issuance of a promissory note. In addition, capital of approximately $2.0 million was extendedSubsequent to us for building improvements on our New Bedford, MA property by the terms of the secured lender.
In October 2018, the CompanyMarch 31, 2019, we raised an additional $14,925,000$5.0 million from the issuance of common stock.
In October and November 2018, pursuanta convertible debenture. Please refer to the terms of a Securities Purchase Agreement, the Company sold an aggregate of $10,000,000 convertible debentures bearing interestnotes accompanying our condensed consolidated financial statements at the rate of 6% per annum that mature three years from issuance, with a 1% issue discount, resulting in net proceeds to the Company of $9,900,000.March 31, 2019 for further discussion on these transactions.
These funds will be used to execute on our strategy to become a direct cultivator, producer, and dispenser of cannabis and cannabis-related products, continue the development of our facilities, and expand our hemp seed wholesale operations and branded licensing business. We continue to require and negotiate for additional sources of capital, although there can be no assurance that any such capital will be available on terms that are acceptable to us.
RESULTS OF OPERATIONS
Three months endedSeptember30, 2018 March 31, 2019 compared to three months ended March 31, 2018September30, 2017
Revenues for the three months ended September 30, 2018 nearly doubled from the same period a year ago, increasing 97.7%March 31, 2019 increased 68.8% from approximately $1.7$2.11 million to approximately $3.4$3.5 million. This significant increase was primarily due to the growth of additional rental incomefees which we earn based on a percentage of revenue generated by our cannabis-licensed clients.For the three months endedMarch 31, 2019, revenue generated by these clients increased 45.7% to approximately $5.3 million from our facilitiesapproximately $3.6 million for the same period in Maryland and Massachusetts which were fully developed and leased2018. The rise in revenues is also attributable to tenants in late calendar 2017, and increased supply procurement services provided to the Company’s cannabis-licensee client in Marylandin 2018. For2019, and the three months endedSeptember30, 2018,expansion of licensing revenue associated with the revenue generated by these clients increased 47.7% to approximately $4.9 million from approximately $3.3 million for the same period in 2017.Company’s branded product line.
Cost of revenues increased from approximately $548,000$889,000 for the three months ended September 30, 2017March 31, 2018 to approximately $1,522,000$1,255,000 for the three months ended September 30, 2018. The increase was dueMarch 31, 2019. As a one-time paymentpercentage of $250,000revenue, however, cost of revenues decreased from 42.7% in 2018 to obtain the exclusive worldwide license of35.7% in 2019, as we continued to leverage our infrastructure to generate higher margins. As a technologyresult, gross profit increased 89.4% from approximately $1,194,000 in 2018 to produceapproximately $2,261,000 in 2019, and distribute cannabis products with exceedingly precise dosing at increased production economies, and a higher level of cost associated with supply procurement from year to year. Accordingly, gross profit as a percentage of revenue decreasedincreased from 68.0% for the three months ended September 30, 201757.3% to 55.1% for the three months ended September 30, 2018.64.3%
Personnel expense increased to approximately $352,000$673,000 for the three months ended September 30, 2018March 31, 2019 from approximately $270,000$185,000 for the same period a year ago. Despite theThe increase in amount, which was primarily the result of the hiring of additional staff to support the(i) higher levellevels of revenues, this expense decreased asrevenue and (ii) our expansion into a percentagedirect owner of revenues to 10.4% in 2018 from 15.7% in 2017.cannabis licenses and operator of seed-to-sale operations.
Marketing and promotion costs increased slightly to approximately $37,000$119,000 for the three months ended September 30, 2018March 31, 2019 from approximately $29,000$52,000 for the same period a year ago. AsThe increase is due to a percentagehigher level of revenue, these costs decreased to 1.1% from 1.7% for the three months ended September 30, 2018public relations we undertook in 2019 and 2017, respectively.a greater presence at industry tradeshows and investor conferences.
General and administrative costs increased to approximately to $619,000$1,691,000 for the three months ended September 30, 2018March 31, 2019 from approximately $581,000$1,279,000 for the same period a year ago. Despite the dollar increase, these costs decreased as a percentage of revenues to 18.3%48.1% from 33.9%61.4%. The year over year decrease in these percentages was aided by a one-time liability writeoff of approximately $100,000, and an approximate $46,000 decrease in the amortization of stock option and warrant issuances from year to year. However, after removing these two items, general and administrative costs as a percentage of revenue still decreased to 52.2% from 61.4%, demonstrating our successful leveraging of our infrastructure to generate higher levels of profitability.
As a result of the above, the operating income more than doubled from approximately $287,000 or 16.7% of revenueloss for the three months ended September 30, 2017,March 31, 2019 was reduced to approximately $861,000 or 25.4%($222,000) from approximately ($322,000) for the same period in 2018.
Non-operating income and expenses improved from a net non-operating expenses balance of revenueapproximately ($1,510,000) for the three months ended September 30, 2018.
Non-operating expensesMarch 31, 2018 to a net non-operating income balance of approximately $11.0 million$300,000 for the three months ended September 30, 2018 wereMarch 31, 2019, an improvement of $1,810,000. This swing from net non-operating expenses to net non-operating income was primarily compriseddue to (i) equity in earnings of (i) interest expense on our mortgages and notes payableinvestment in GenCanna of approximately $478,000,$2,005,000, which was converted from a debenture receivable to equity in February 2019, (ii) loss on debt settlements of approximately $1,214,000 in 2018 compared with no such loss in 2019, and (iii) the previous two items offset by interest income on our note receivable of approximately $23,000, (ii) non-cash amortization of stock option and warrant issuances of approximately $8.1 million arising from the issuance of stock options and warrants, and (iii) non-cash losses on the settlement of debt via the issuance of common stock of approximately $2.4 million. The two non-cash items, required by generally accepted accounting principles, had no effect on the operating earnings or liquidity of the Company. These non-cash items gave rise to the large year-over-year increase. For the same periodan increase in 2017, non-operating expenses approximated $601,000 and were comprised of (a) net interest expense of approximately $90,000, and (b) non-cash amortization of stock option and warrant issuances, and debt settlement losses of approximately $738,000, offset by a gain of approximately $227,000 from the write-off of deferred revenue.$1,362,000.
As a result of the foregoing, we realized a net lossincome of approximately $314,000$78,000 for the three months ended September 30, 2017,March 31, 2019, compared with a net loss of approximately $10.1 million($1,832,000) for the same period in 2018. The net losses were due to the previously explained non-cash items which had no impact on the Company’s operating income or cash flow. Excluding these non-cash items, net income
Additionally, for the three months ended September 30, 2017 and 2018 wasMarch 31, 2019, the Company achieved adjusted EBITDA of approximately $197,000 and $406,000, respectively.
Nine months endedSeptember30, 2018$585,000, an increase of 76.2%, compared to nine months endedSeptember30, 2017
Revenues for the nine months endedSeptember30, 2018 increased 87.5% to approximately $8.4 million, compared with $4.5 million from the same period a year ago. This significant increase was primarily due to the growth of (i) rental income from our facilities in Maryland and Massachusetts which were fully developed and leased to tenants in late calendar 2017, (ii) supply procurement services provide to additional cannabis licensees in 2018, and (iii) management fees and additional rental revenue which we earn based on a percentage of revenue generated by our cannabis-licensed clients. For the nine months endedSeptember30, 2018, the revenue generated by these clients increased 56.6% to approximately $13.1 million from approximately $8.4 million for the same period in 2017.
Cost of revenues increased to approximately $3.3 million for the nine months ended September 30, 2018 from approximately $1.5 million for the nine months ended September 30, 2017. As a percentage of revenue, cost of revenues for the nine months ended September 30, 2018 increased to 39.5% from 33.2% for the same period in 2017. This increase was attributable to a higher level of cost associated with supply procurement and licensed products from year to year, as well as a one-time payment of $250,000 to obtain the exclusive worldwide license of a technology to produce and distribute cannabis products with exceedingly precise dosing at increased production economies. Accordingly, gross profit as a percentage of revenue for the nine months ended September 30, 2018 decreased to 60.5% from 66.8% for the same period in 2017.
Personnel expense increased to approximately $822,000 for the nine months ended September 30, 2018 from $575,000$332,000 for the same period a year ago. DespitePlease see the increase in amount,following section which was the resultfurther explains adjusted EBITDA.
Non-GAAP Financial Information – Adjusted EBITDA
We are providing a non-GAAP financial measurement of hiring additional staff to support the higher level of revenues, this expense decreasedprofitability –adjusted EBITDA – as a percentagesupplement to the preceding discussion of revenues to 9.8%our financial results, which are based on our consolidated financial statements prepared in 2018 from 12.8% in 2017.accordance with GAAP.
MarketingManagement utilizes adjusted EBITDA internally in analyzing our financial achievements, operational performance, and promotion costs increasedliquidity. The presentation of adjusted EBITDA is not intended to approximately $167,000be considered in isolation or as a substitute for the nine months ended September 30, 2018 from approximately $144,000 for the same period a year ago. These costs decreased relative to the growthfinancial information prepared in revenues from year to year, representing 2.0% and 3.2% of revenues in 2018 and 2017, respectively.accordance with GAAP.
GeneralWe believe that both management and administrative costs increased to approximately $2,141,000 for the nine months ended September 30, 2018investors benefit from approximately $1,164,000 for the same periodconsidering adjusted EBITDA in assessing our financial results and when planning, forecasting and analyzing future periods. Additionally, adjusted EBITDA provides investors and analysts with a year ago. Year over year, these costs remained at a steady 25% of revenues. This increase is predominantly due to the utilities, real estate taxes, security, and other cost associated withkey financial metric we use in making operating an increased number of active facilities,decisions, and is commensuratealso a key metric used by investors and analysts themselves, along with other metrics, to assess the growthfinancial condition of revenues and the overalla business.
AsWhile adjusted EBITDA can be a resultuseful supplemental measure to analyze the Company’s operations and liquidity, it does have limitations. Some limitations of the above,adjusted EBITDA are as follows:
| - | Adjusted EBITDA does not include the impact of stock-based expenses, impairment or write downs of intangible assets, acquisition-related transaction expenses, or the gains or losses associated with the extinguishment of debt via the issuance of stock. | |
| - | Adjusted EBITDA does not take into account interest income or expense, income taxes, or depreciation and amortization of fixed assets and intangibles. | |
| - | Analysts, investors, and other companies, even those within our industry, may calculated adjusted EBITDA differently or not at all, which may reduce its usefulness as a comparative measure. |
The following table provides a reconciliation between operating income increased 75.4% from approximately $1.1 million during the nine months ended September 30, 2017, to approximately $2.0 million during the nine months ended September 30, 2018.(loss) and adjusted EBITDA:
Non-operating expenses of approximately $20.2 million for the nine months ended September 30, 2018 were primarily comprised of (i) interest expense on our mortgages and notes payable of approximately $1,081,000, offset by interest income on our note receivable of approximately $62,000, (ii) non-cash amortization of stock option and warrant issuances of approximately $15.0 million, and (iii) non-cash losses on the settlement of debt via the issuance of common stock of approximately $4.2 million. The two non-cash items, required by generally accepted accounting principles, had no effect on the operating earnings or liquidity of the Company, and the cause for the large year-over-year variation in non-operating expenses. For the same period in 2017, non-operating expenses approximated $816,000 and were comprised of (a) net interest expense of approximately $268,000, and (b) non-cash amortization of stock option and warrant issuances, and debt settlements of approximately $776,000, offset by a gain of approximately $227,000 from the write-off of deferred revenue.
| Three months ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Operating income (loss) | $ | (222,281 | ) | $ | (321,641 | ) | ||
| Depreciation | 218,196 | 80,791 | ||||||
| Amortization of intangibles | 61,667 | - | ||||||
| Amortization of stock option and warrant issuances | 527,163 | 572,807 | ||||||
| Adjusted EBITDA | $ | 584,745 | $ | 331,957 | ||||
As a result of the foregoing, we incurred a net loss of approximately $18.2 million for the nine months ended September 30, 2018, compared to net income of approximately $300,000 from the same period a year ago. The loss in the current period is due to the previously explained large non-cash expenses which had no impact on the Company’s operating income or cash flow. Excluding these non-cash items, net income for the nine months ended September 30, 2018 was approximately $936,000.
Subsequent Events
Notes ReceivableDebentures Payable Conversion
In October and November 2018,April 2019, the Company purchased an additional $23.25 million of GC Debentures, at which time the Company entered into a Subscription Agreement for Convertible Debentures (the “SA”) with GenCanna governing the aggregate GC Debentures purchased of $30 million. The SA maintains the provisionsHolder of the $6.75M$10M Debentures converted $500,000 of GC Debentures previously purchased asprincipal and approximately $70,000 of September 30, 2018. Additionally, among other provisions, the Company shall have the right to appoint one director to GenCanna’s board,accrued interest into 211,015 shares of common stock at conversion prices of $2.67 and shall fund a $10 million employee bonus pool should GenCanna meet certain 2019 operating targets.$2.74 per share.
Pursuant to a Security and Pledge Agreement executed with GenCanna in November 2018, the Company was granted a senior security interest on certain assets of GenCanna equal in value to 100% or more of the principal and accrued interest on the GC Debentures until such time the GC Debentures are paid down, redeemed or converted. Additionally, the Company was granted certain other rights, pursuant to a Rights Agreement, including rights of inspection, financial information, and participation in future security offerings of GenCanna.
Conversion of the Company’s entire $30 million investment shall equate to at least a 33.3% ownership interest in GenCanna on a fully diluted basis.
Debt Issuance
In October and November 2018, pursuant to the terms of a Securities Purchase Agreement (the “SPA”),May 2019, the Company sold an aggregateadditional $5,000,000 of $10,000,000 convertible debentures bearing interest at the rate of 6% per annum that mature threetwo years from issuance, with a 1% issue discount, resulting in net proceeds to the Company of $9,900,000$4,950,000 (the “$10M5M Debentures”).
The holder of the $10M$5M Debentures (the “Holder”) shall have the right at any time to convert all or a portion of the $10M Debenture, along with accrued and unpaid interest, into the Company’s common stock at conversion prices equal to 80% of a calculated average, as determined in the $10M Debentures, of the daily volume-weighted price during the ten consecutive trading days preceding the date of conversion. Notwithstanding this conversion right, the Holder shall limit conversions in any given month to certain agreed-upon values based on the conversion price, and the Holder shall also be limited from beneficially owning more than 4.99% of the Company’s outstanding common stock (potentially further limiting the Holder’s conversion right).
The Company shall have the right to redeem all or a portion of the $10M Debentures, along with accrued and unpaid interest, at a 10% premium, provided however that the Company first provide advance written noticewere sold to the Holder of its intention to make a redemption, with the Holder allowed to affect one or more conversions$10M Debentures. The terms of the $10M Debentures during such notice period.
Upon a change in control transaction, as defined in the $10M Debentures, the Holder may require the Company to redeem all or a portion of the $10M Debentures at a price equal to 110% of the principal amount of the $10M Debentures plus all accrued and unpaid interest thereon. So long as the $10M$5M Debentures are outstanding, in the event the Company enters into a Variable Rate Transaction (“VRT”), as defined in the SPA the Holder may cause the Company to reviseconsistent with the terms of the $10M Debentures to match the terms as described inNote 12 – Debentures Payable of the convertible security of such VRT. As part of issuance ofCompany’s financial statements for the $10M Debenture,three months ended March 31, 2019, with small variations, most notably a cap on the conversion price. The Company also issued three-year warrants to the Holder to purchase 324,675400,000 shares of common stock at an exercise prices of $3.50 and $5.50$4.00 per share (the “Warrants”).share.
Pursuant to the terms of a Registration Rights Agreement with the Holder, entered into concurrently with the SPA and the $10M Debentures, the Company agreed to provide the Holder with customary registration rights with respect to any potential shares issued pursuant to the terms of the SPA, the $10M Debentures, and the Warrants.
AcquisitionsSeed Inventory Purchases
In October 2018, the Company entered into a purchase agreement to acquire 100%April 2019, Mari-Hemp purchased an additional $3.5 million of the ownership interests of KPG of Anna LLCindustrial hemp seeds for wholesale hemp distribution and KPG of Harrisburg LLC, the Company’s two cannabis-licensed clients that operate medical marijuana dispensaries in the state of Illinois (both entities collectively, the “KPGs”), from the current ownership group of the KPGs (the “Sellers”). As part of this transaction, the Company will also acquire the Sellers’ ownership interests of Mari Holdings IL LLC, the Company’s subsidiary which owns the real estate in which the KPGs’ dispensaries are located (“Mari-IL”). The purchase price of 1,000,000 shares of the Company’s common stock shall be issued to the Sellers upon the closing of the transaction, which is dependent upon, among other closing conditions, the approval by the Illinois Department of Financial and Professional Regulation. After the transaction is effectuated, the KPGs and Mari-IL will be a wholly-owned subsidiary of the Company.hemp-derived CBD product development.
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. ARL holds three cannabis licenses from the state of Massachusetts for the cultivation, production
Item 3. Quantitative and dispensing of cannabis. Upon approval of the conversion plan by the state, the Company shall be the sole shareholder of ARL, and shall elect its current COO to serve as ARL’s sole board member.Qualitative Disclosure About Market Risk
As of September 30, 2018,a smaller reporting company, we are not required to provide the Company had not yet received the legislative approval that isinformation required for all ownership changes of cannabis licensees, and therefore the operations of the KPGs and ARL were not consolidated in the Company’s financial statements as of such date. The Company anticipates that approval for these transactions will be obtained, and those deals consummated, prior to the end of the current fiscal year, or in early 2019. When that occurs, the Company will consolidate the acquired entities in accordance with GAAP.by this Item.
In October 2018, the Company acquired BSC Group LLC, a multidisciplinary advisory firm that provides operational, marketing, and licensing management services to companies within the cannabis industry.
Equity Transactions
In October 2018, the Company (i) sold 4,999,242 shares of common stock at prices of $2.20 and $3.00 per share, resulting in total proceeds of $14,925,000, and (ii) issued three-year warrants to purchase 1,201,163 shares of common stock at exercise prices ranging from $3.50 to $5.50 per share.
In October 2018, warrants to purchase 222,775 shares of common stock were exercised at exercise prices ranging from $0.40 to $1.75 per share, and options to purchase 60,000 shares of common stock were exercised at an exercise price of $0.45 per share in a cashless transaction.
Item 4. Controls and Procedures
As
Management’s Evaluation of September 30, 2018, we carried out an evaluation, underOur Disclosure Controls and Procedure
Under the supervision and with the participation of our management, including our Chief Executive Officerprincipal executive officer and Chief Financial Officer,our principal financial officer, we are responsible for conducting an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, (as such term isas defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).amended (the “Exchange Act”), as of March 31, 2019. Disclosure controls and procedures means that the material information required to be included in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms relating to our company, including any consolidating subsidiaries, and was made known to us by others within those entities, particularly during the period when this report was being prepared. Based upon thaton this evaluation, and in light of the weaknesses in our Chief Executive Officerinternal control over financial reporting described below, our principal executive officer and Chief Financial Officerprincipal financial officer concluded that our disclosure controls and procedures were not effective as of September 30,March 31, 2019.
The ineffectiveness of our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) was due to an insufficient degree of segregation of duties amongst our accounting and financial reporting personnel, and the lack of a formalized and complete set of policy and procedure documentation evidencing our system of internal controls over financial reporting. These factors lead to certain adjustments which had been reflected in our audited financial statements as of December 31, 2018. TheThese weaknesses are not uncommon in a company of our size due to personnel and financial limitations.
During 2019, we have started to work to remediate the material weaknesses identified above, which has included the hiring of an accounting and financial professional with experience in the implementation of GAAP and SEC reporting requirements, and discussion with several independent accounting and auditing firms regarding the retention of such a firm to review, document, and test for effectiveness our internal controls over financial reporting.
Additionally, we expect to continue remediation efforts throughout 2019 by the engagement of accounting consultants as needed to provide expertise on specific areas of the accounting guidance, the continued hiring of individuals with appropriate experience in internal controls over financial reporting, and the modification to our accounting processes and enhancement to our financial controls including the ongoing testing of such controls. Our financial position will determine the extent to which such efforts can be made.
Our management will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement notwithstanding, you are cautioned that no system is foolproof.preparation and presentation.
Changes in Internal Control Over Financial Reporting
During the quarter covered by this reportOther than as described above, there werehas been no changeschange in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) underduring the Securities Exchange Act of 1934, as amended)period to which this report relates that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
| 39 |
This quarterly report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s reports in this quarterly report.
None.
We
As a smaller reporting company, we are not obligatedrequired to disclose our risk factors inprovide the information required by this report, however,Item. However, limited information regarding our risk factors appears inPart I, Item 2. “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations”Operations under the caption “Forward-Looking Statements”Forward-Looking Statements contained in this Quarterly Report on Form 10-Q.10-Q and in “ItemItem 1A. RISK FACTORS” FACTORSof our Annual Report on Form 10-K.10-K for the year ended December 31, 2019. There have been no material changes from the risk factors previously disclosed in oursuch Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the ninethree months ended September 30, 2018, the CompanyMarch 31, 2019, we sold 10,111,578799,995 shares of restricted common stock at prices ranging from $0.50 to $1.37a price of $3.25 per share, resulting in total proceeds of approximately $8.5$2.6 million. These funds will be used to fund Companyour operations, continue the development of our facilities, and expand our hemp seed wholesale operations and branded licensing business.
The securities described above were issued to accredited investors in private transactions not involving a public offering or the payment of commissions.The sales of the securities 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 4(a)(5) of the Securities Act and Regulation D promulgated thereunder.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosure
Not applicable.
None.
On November 8, 2018, we purchased an additional $17.25 million of subordinated secured convertible debentures (the “GC Debentures”) of GenCanna Global, Inc., a world leader in the production and distribution of agricultural hemp, cannabidiol (CBD) formulations, hemp genetics, and hemp products (“GenCanna”). As a result of such purchase, our investment in the GC Debentures aggregated $30 million.
The GC Debentures bear interest at a compounded rate of 9% per annum and mature three years from issuance. We have been granted (i) a senior security interest on certain assets of GenCanna equal in value to 100% or more of the principal and accrued interest on the GC Debentures, and (ii) certain other rights including the right to appoint a member to GenCanna’s board of directors, rights of inspection and the right to participate in future offerings of securities by GenCanna.
The GC Debentures are convertible into the common stock of GenCanna, at our option, (i) upon the occurrence of a Liquidity Event, as defined in the GC Debentures, or (ii) after December 31, 2018, upon ten days prior written notice to GenCanna. The conversion price is equal to the lesser of a 20% discount to the price of the Liquidity Event, or the price based on a defined post-money valuation of GenCanna. If a Liquidity Event does not occur on or before June 30, 2020, the Company shall have the option to be redeemed in cash for the principal amount of the GC Debenture plus all accrued and unpaid interest thereon.
Conversion of the entire $30 million of GC Debentures would equate to at least a 33.3% interest in GenCanna on a fully diluted basis.
Item 6. Exhibits
| 101.INS XBRL | Instance Document (Filed herewith.) | |
| Taxonomy Extension | ||
| Taxonomy Extension | ||
| Taxonomy Extension | ||
| Taxonomy Extension Presentation Linkbase (Filed herewith.) |
In accordance withPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Reportreport to be signed on its behalf by the undersigned thereto duly authorized.
Date: November 14, 2018May 10, 2019
| MARIMED INC. | ||
| By: | /s/ Robert Fireman | |
| Robert Fireman | ||
President and Chief Executive Officer (Principal Executive Officer) | ||
| By: | /s/ Jon R. Levine | |
| Jon R. Levine | ||
Chief Financial Officer (Principal Financial Officer) | ||
INDEX TO EXHIBITS