UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2018

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________________ to __________________

 

Commission File number 0-54433

 

MARIMED INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   27-4672745

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

10 Oceana Way

Norwood, MA 02062

(Address of Principal Executive Offices)

 

617-795-5140

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name Of Each Exchange On Which Registered
None   Not Applicable

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

[  ] Large Accelerated Filer [X] Accelerated Filer
   
[  ] Non-Accelerated Filer [X] Smaller reporting company

[X] Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.): Yes [  ] No [X]

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price as of June 29, 2018 of $2.31 per share, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $258.4 million.

 

At April 16, 2019, the issuer had outstanding 212,425,383 shares of Common Stock, par value $.001 per share.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
Part I    
Item 1 Business 2
Item 1A Risk Factors 8
Item 1B Unresolved Staff Comments 14
Item 2 Properties 14
Item 3 Legal Proceedings 14
Item 4 Mine Safety Disclosures 14
Part II    
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15
Item 6 Selected Financial Data N/A
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A Quantitative and Qualitative Disclosures About Market Risk N/A
Item 8 Financial Statements 25
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 50
Item 9A Controls and Procedures 50
Item 9B Other Information 51
Part III    
Item 10 Directors, Executive Officers and Corporate Governance 52
Item 11 Executive Compensation 55
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 58
Item 13 Certain Relationships and Related Transactions, and Director Independence 59
Item 14 Principal Accountant Fees and Services 59
Item 15 Exhibits, Financial Statement Schedules 60
Item 16 10-K Summary 60

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

 

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve risks and uncertainties and our actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “estimate,” “could,” “should,” “would,” “project,” “predict,” “intend,” “plan,” “will,” “believe,” and similar language, including those set forth in the discussion under “Description of Business,” “Risk Factors” and “Management’s Discussion and Analysis or Plan of Operation” as well as those discussed elsewhere in this Form 10-K. We base our forward-looking statements on information currently available to us, and we believe that the assumption and expectations reflected in such forward-looking statements are reasonable, and we assume no obligation to update them. Statements contained in this Form 10-K that are not historical facts are forward-looking statements that are subject to the “safe harbor” created by the Private Securities Litigation Reform Act of 1995.

 

 (1) 
 

 

PART I

 

ITEM 1. BUSINESS.

 

General

 

MariMed Inc. (“we”, “our”, “us”, “MariMed”, or the “Company”) is a leader in the emerging legal cannabis industry. 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 six independent operations in six states – Delaware, Illinois, Maryland, Massachusetts, Nevada, and Rhode Island. 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.

 

It is the Company’s plan to ultimately consolidate the ownership of the six  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, the Company has developed precision-dosed cannabis-infused products designed for specific medical conditions and related symptoms. These products are licensed under Company-owned brands such as Kalm Fusion™, Betty’s Eddies™, and Nature’s Heritage™, in the form of dissolvable strips, tablets, powders, microwaveable popcorn, fruit chews, and with more varieties in development. The Company also sublicenses several top brands including Lucid Mood™ disposable vape pens, Vitiprints™ printable dissolvable discs, and DabTabs™ revolutionary vaporization tablets infused with cannabis concentrates. The Company plans to continue licensing the best 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.

 

The Company’s operations have increased significantly over the past several years. For the year ended 2018:

 

Revenues increased 95% from approximately $6.1 million to $11.9 million;
   
Adjusted EBITDA (a non-GAAP financial measurement explained in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations) increased 53% from approximately $1.6 million to $2.4 million; and
   

Total assets increased 158% from approximately 32.2 million to $83.0 million.

 

These increases are in large part the result of the successes of Company-advised clients, whose revenues grew in excess of 50% from approximately $12.2 million to $18.5 million. As a result of the Company’s strategic decision to focus on owning and operating cannabis businesses, which will include the acquisition of these clients, management fees and rental income are expected to decline, and be replaced by significant operating revenues and earnings from the directly-owned seed-to-sale cannabis and hemp operations.

 

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 of precision-dosed cannabis-infused products which are currently licensed and distributed in cannabis-legal states. Going forward, the Company 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 diligent in identifying and reviewing the latest sciences and processes applicable to the cultivation, distillation, production, packaging, securing, and distribution of cannabis and cannabis-infused products. We have obtained the highest quality cannabis strains and genetics. We are at the leading edge of patient education and physician outreach for cannabis, and we seek strategic relationships with companies that are at the forefront of extraction and distillation.

 

 (2) 
 

 

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 is constructing 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 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

 

The Company has 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 contracted to purchase a 9,000 square foot building in Anne 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”). Subject to state approval, the Company intends to acquire 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.

 

 (3) 
 

 

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 medical professionals and consumers who seek scientific knowledge and research regarding medical cannabis and hemp. Accordingly, in addition to the aforementioned objectives, one of MariMed Hemp’s priorities will be to provide credible research-based information about the health benefits of cannabis and hemp to medical providers and their patients, many of whom express a strong and growing appetite for knowledge on this topic. Armed with this knowledge, such healthcare professionals and consumers will be able to effectively and safely choose from a broad, and potentially confusing, range of cannabis products.

 

As part of 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 proprietary formulations for hemp-derived CBD, and currently operates in Lithuania and Texas. Its Florance brand, 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 in the marketing and distribution of Florance and newly-developed products throughout the United States and Europe.

 

Pipeline Transactions

 

MariMed is actively pursuing other growth opportunities to expand its asset portfolio in the 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.

 

 (4) 
 

 

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 Company’s license agreement from Worlds Inc. with respect thereto have expired, and we do not expect to be engaged in this business.

 

In early 2014, the Company transitioned its operational focus to the emerging cannabis industry. In order to quickly gain traction into this new space, in May 2014, the Company, through its wholly-owned subsidiary MariMed Advisors Inc., acquired Sigal Consulting LLC (“Sigal”), a company operating in the cannabis industry.

 

The purchase price paid to the former owners of Sigal consisted of (i) an aggregate amount of the Company’s common stock equal to 50% of the outstanding shares on the closing date of September 29, 2014, (ii) options to purchase three million shares of the Company’s common stock, exercisable over five years with exercise prices ranging from $0.15 to $0.35, and (iii) a 49% ownership interest in MariMed Advisors Inc.

 

During the first half of calendar 2017, the Company changed its name to MariMed Inc. and its ticker symbol to MRMD. Also during this time, the number of authorized shares of the Company’s common and preferred stock were increased to 500 million and 50 million, respectively, and the Company purchased the remaining 49% interest in MariMed Advisors Inc. in exchange for 75 million shares of common stock. 

 

In July 2017, Robert Fireman was named as the Company’s CEO and President, and Jon R. Levine as the CFO, Treasurer, and Secretary.

 

In October 2017, the Company acquired the intellectual property, formulations, recipes, proprietary equipment, know-how, and other certain assets of the Betty’s Eddies™ brand of cannabis-infused fruit chews.

 

In 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 AgriMed Industries of PA LLC (“AgriMed”), an entity that holds a Pennsylvania license for the cultivation of cannabis and cannabis products that can be wholesaled to medical marijuana dispensaries within the state. In February 2019, the Company filed a complaint against AgriMed for specific performance of their obligations under the purchase agreement.

 

In August 2018, the Company purchased a 23% ownership interest in CVP Worldwide LLC d/b/a Sprout, an entity that provides a customer relationship management and marketing platform, branded under the name Sprout, specifically designed for companies in the cannabis industry.

 

In August 2018, the Company obtained the exclusive worldwide license from Vitiprints LLC to sublicense, use, develop, promote, sell or otherwise commercialize in any way a proprietary technology that produces precision-dosed cannabis products at multiple combinations of cannabinoids, terpenes, and nutrients, into a paper-thin, low-calorie, fast-absorbing product that is delivered sublingually, transdermally, or by drinking when dissolved in liquid, all at scale and at exceedingly reduced cost.

 

 (5) 
 

 

During the period September 2018 to November 2018, in a series of investments, the Company purchased an aggregate of $30 million of subordinated secured convertible debentures of GenCanna. In February 2019, the Company converted the debentures plus accrued interest through the conversion date into a 33.5% equity interest on a fully diluted basis. 

 

In October 2018, the Company entered into a purchase agreement to acquire KPG of Anna LLC and KPG of Harrisburg LLC, the Company’s two cannabis-licensed clients that operate medical marijuana dispensaries in the state of Illinois (both entities collectively, the “KPGs”). As part of this transaction, the Company will also acquire the remaining minority interests of Mari Holdings IL LLC, the Company’s subsidiary that owns the real estate where the KPGs’ two dispensaries are located, from the KPGs’ current ownership group. The parties are currently awaiting state approval of the transaction which is expected to be 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. In November 2018, the Company received written confirmation of state approval of the conversion plan from the state, making ARL a wholly-owned subsidiary of the Company.

 

In November 2018, the Company entered into an agreement to acquire The Harvest Foundation LLC, the Company’s client awarded a cannabis license for cultivation in the state of Nevada. The acquisition is conditional upon state approval which is expected to occur in May 2019.

 

In December 2018, the Company made a $500,000 investment in Iconic Ventures Inc. which has developed DabTabs™, a revolutionary product that consists of a convenient portable tablet that delivers precise dosing and acts as a storage system for full spectrum cannabinoid vaporization. Additionally, the Company secured the exclusive distribution rights for six states and is in the process of beginning distribution in the state of Maryland.

 

In December 2018, the Company executed a memorandum of understanding 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 the fourth quarter of calendar 2019.

 

Business Activities

 

As previously described, the Company is in the process of transitioning from a fee for service business to a direct owner and operator of cannabis businesses across six states – DE, IL, NV, MD, MA, and RI. The Company has played a key role in the successes of these entities, from the securing of cannabis licenses to the development of facilities and providing operational guidance. Accordingly, the Company believes it is well suited to manage the continuing growth of these operations which the Company intends to ultimately own, recognizing that current ownership laws require modification in a subset of these locations.

 

A key reason for completing this transition is to present a simpler, more transparent financial picture to the investor community. Once the consolidation is complete, our financial statements will provide a clearer picture of the revenues, earnings, and other financial metrics that the Company is generating, rather than the current fee-for-service revenue model that reports only consulting and management fees, but obscures the true size of the Company’s overall business

 

Our team has developed state-of-the-art regulatory-compliant facilities which are models of excellence in horticultural principles, cannabis production, product development, and dispensary operations. We have developed proprietary operating processes and procedures that employ industry best practices. The Company intends to use its past success and expertise in applying for state regulated cannabis licenses to expand the footprint across the United States.

 

In addition, we are at the forefront of precision-dosed branded cannabis and hemp-derived products for the treatment of specific medical conditions. We currently enable our licensees to manufacture and distribute our branded products in ten states, and are expanding licensing and distribution to additional markets, encompassing thousands of dispensaries and additional retail outlets.

 

Cannabis remains a Controlled Substance under federal law which makes conventional funding difficult to obtain. However, the Company has thus far been successful in raising growth capital from private investors and funds.

 

The Company has developed a brand of cannabis-infused products that are designed to be precision-dosed for specific medical conditions and symptoms. These products are developed by the Company in cooperation with state-licensed facilities and operators who meet the Company’s strict standards, including natural— not artificial or synthetic — ingredients. We license our product formulations only to knowledgeable manufacturing professionals who agree to adhere to our precise scientific formulations using our trademarked product recipes.

 

The Company’s investment in one of the largest hemp producers in the US, GenCanna, and the introduction of MariMed Hemp, only solidifies the Company’s position as an industry thought leader.

 

 (6) 
 

 

Business Structure

 

The Company’s business has historically involved creating private limited liability companies to purchase real estate for the development of cultivation, processing, and dispensing facilities. These single-state LLCs are on occasion jointly owned by the Company and investors, with the share of ownership and the allocation of return negotiated on a deal specific basis. This structure was employed successfully in projects in Delaware, Illinois, Massachusetts, Maryland, and Nevada.

 

As of December 31, 2018, the Company developed and provided operational oversight to clients operating six cannabis facilities in Delaware, Illinois, Nevada, and Maryland, with five additional facilities currently being developed in Maryland and Massachusetts. The Company has also assisted clients to develop additional licensed facilities in other state licensed-programs.

 

However, as previously mentioned, the Company is currently in the process of acquiring its clients’ licenses and operations. Once these acquisitions are complete, it is anticipated that all of these facilities and operations will be wholly-owned by the Company.

 

Alliances

 

The Company has entered into a licensing agreement with Tikun Olam USA, the first developer of medical cannabis products in Israel. The agreement provides the Company with the ability to sublicense certain medical cannabis genetics developed in Israel to our Delaware and Maryland clients.

 

A strategic relationship and licensing agreement between the Company and Chooze Corp. has made the Company the leading revenue generator in the United States for Chooze’s cannabis-infused mood-enhancing products such as Lucid Mood™.

 

The Company also has a strategic relationship and exclusive distribution agreement with The Healer, an entity featuring products developed by Dr. Dustin Sulak, a nationally renowned cannabis practitioner. Dr. Sulak was recently featured on CNN’s series with Dr. Sanjay Gupta on how cannabis can help patients addicted to opioids. The Healer’s whole-plant filtration process is at the core of Dr. Sulak’s quality formulations in The Healer’s products, which the Company has funded and marketed in the Maryland Medical Cannabis program. The Healer’s instore training to patient assistants and patients has been very successful in Maryland, and it intends to roll out this program in Delaware, Massachusetts, and several other states.

 

As previously mentioned, the Company has entered into an exclusive agreement to sublicense the innovative DabTabs™ portable tablets that deliver convenient, precisely-dosed full spectrum cannabinoid vaporization.

 

The Company’s investment in Sprout, a customer relationship management and marketing platform designed for companies in the cannabis industry, will potentially connect the Company to hundreds of legal cannabis dispensaries. The Company intends to work with these dispensaries and Sprout to develop a database of patients that utilize cannabinoid medicines for their health and wellness, and which will allow interaction with these patients for marketing and education.

 

Competition

 

The Company is in a state of transition that we expect will make it one of the more prominent multi-state cannabis companies in the industry. While we have a competitive advantage – as we have incubated our clients and supported their growth from bottom up, and we have built our own brands and products – the capital currently being raised by competing companies on the Canadian Stock Exchange and through other means has created new multi-state operators who are investing millions of dollars to purchase licensed facilities in the United States.

 

Additionally, while Company has a comprehensive suite of products and services for the cannabis industry, we face competition from companies of varying sizes and geographic reach, who produce and sell products similar to ours. Some of these companies provide a subset of our product and service offerings, while others are able to provide an equivalent level of the products and services offered by the Company. Our sales could be reduced significantly if our competitors develop and market products that are more effective, more convenient, or are less expensive than our products. Going forward, as cannabis and hemp products become more mainstream and have greater acceptance, it is likely that larger and more established companies, with greater available resources including name recognition and national distribution networks, will enter the field. At the same time, we believe the emerging cannabis industry is growing at such a pace that there are more opportunities available than current cannabis businesses can support. With abundant opportunities, our Company at times works with others to insure a positive image in new and emerging states. Until recently, the black market and illegal cannabis traffickers that controlled this industry years ago from the shadows are a lesser competitive threat as such groups are diminishing. 

 

 (7) 
 

 

Intellectual Property

 

The Company has currently filed for trademark protection for its branded product lines.

 

Our proprietary processing, and manufacturing techniques and technologies, while not patented at this time, are kept strictly confidential. We enter into and enforce confidentiality agreement with key employees and consultants to protect our IP and general know-how.

 

Employees

 

As of December 31, 2018, the Company expanded to a total of 28 employees, all of which were full-time. We retained a variety of supporting consultants and oversaw many employees of the cannabis-licensees we advise to implement our policies and procedures. Upon successful completion of the consolidation of business operations, the Company expects to add upwards of 400 additional employees.

 

ITEM 1A. RISK FACTORS

 

Our business is subject to numerous risks, including but not limited to those set forth below. Our operations and performance could also be subject to risks that do not exist as of the date of this report but emerge thereafter as well as risks that we do not currently deem material.

 

Risks related to our operations

 

Marijuana remains illegal under federal law.

 

Marijuana remains illegal under federal law. It is a Schedule I controlled substance. Even in those jurisdictions in which the use of medical marijuana has been legalized at the state level, its prescription is a violation of federal law. The United States Supreme Court has ruled that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes. Therefore, federal law criminalizing the use of marijuana trumps state laws that legalize its use for even medicinal purposes. At present the states are standing tall against the federal government, maintaining existing laws and passing new ones in this area. States continue to exert this freedom notwithstanding Attorney General Sessions officially leaving prosecution discretion against state licensed cannabis facilities to local US Attorneys district by district, which position has yet to be addressed by Attorney General Barr. This was a change from the Obama administration which under Attorney General Holder, had a policy decision to allow states to implement these laws and not prosecute anyone operating in accordance with applicable state law. The United States House of Representatives continues to not fund in the budget any funds for the Department of Justice to prosecute state compliant licensed cannabis companies. However, we continually face election cycles, and a new administration or the United States Congress could introduce a less favorable policy. A change in the federal attitude towards enforcement could cripple the industry. However, the medical marijuana industry is our primary target market, and if this industry was unable to operate, we would lose the majority of our potential clients, which would have a significantly negative impact on our business, operations and financial condition.

 

Our continued growth is dependent on additional states legalizing marijuana.

 

Continued development of the marijuana market is dependent upon continued legislative authorization of marijuana at the state level for medical and adult recreational use. Any number of factors could slow or halt the progress. Further, progress, while encouraging, is not assured and the process normally encounters set-backs before achieving success. While there may be ample public support for legislative proposal, key support must be created in the legislative committee or a bill may never advance to a vote. Numerous factors impact the legislative process. Any one of these factors could slow or halt the progress and adoption of marijuana for medical and/or recreational purposes, which would limit the market for our products and negatively impact our ability to grow into other states.

 

 (8) 
 

 

It will be difficult for you to evaluate us based on our past performance because we are a relatively new company with a limited operating history.

 

We have been actively engaged in the marijuana related business for a relatively short period of time and, accordingly, have only limited financial results on which you can evaluate our company and operations. We are subject to, and must be successful in addressing, the risks typically encountered by new enterprises and companies operating in the rapidly evolving cannabis marketplace, including those risks relating to:

 

  the failure to develop brand name recognition and reputation;
     
  the failure to achieve market acceptance of our services;
     
  a slowdown in general consumer acceptance of legalized marijuana; and
     
  an inability to grow and adapt our business to evolving consumer demand.

 

The medical cannabis industry faces strong opposition from traditional medicines.

 

It is believed by many that existing, entrenched, well-funded, businesses may have a strong economic opposition to the medical marijuana industry as currently formed. For example, we believe that the pharmaceutical industry does not want to cede control of any compound that could become a strong selling drug. Specifically, medical marijuana will likely adversely impact the existing market for Marinol, the current “marijuana pill” sold by mainstream pharmaceutical companies. Further, the medical marijuana industry could face a material threat from the pharmaceutical industry should marijuana displace other drugs or simply encroach upon the pharmaceutical industry’s market share for compounds such as marijuana and its component parts. The pharmaceutical industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement. Any inroads the pharmaceutical industry makes in halting or rolling back the medical marijuana movement could have a detrimental impact on the market for our products and thus on our business, operations and financial condition.

 

Our clients may have difficulty accessing the service of banks, which may make it difficult for them to purchase our products and services.

 

As discussed above, the use of marijuana is illegal under federal law. Therefore, there are banks that will not accept for deposit funds from sale of cannabis and may choose not to do business with our clients. While a member of the United States Congress has stated he will seek an amendment to banking regulations and laws in order to allow banks to transact business with state-authorized medical marijuana businesses, there can be no assurance his legislation will be successful, that banks will decide to do business with medical marijuana retailers, or that in the absence of legislation state and federal banking regulators will not create issues on banks handling funds generated from an activity that is illegal under federal law. Notwithstanding, the Company has been able to secure state-chartered banks that are in compliance with federal law and provide certain banking services to companies in the cannabis industry. The inability of potential clients in our target market to open accounts and otherwise use the service of banks may make it difficult for them to purchase our products and services.

 

We may not be able to economically comply with any new government regulation that may be adopted with respect to the cannabis industry.

 

New legislation or regulation, or the application of existing laws and regulations to the medical and consumer cannabis industries could add additional costs and risks to doing business. We are subject to regulations applicable to businesses generally and laws or regulations directly applicable to communications over the Internet and access to e-commerce. Although there are currently few laws and regulations regulating the cannabis products, it is reasonable to assume that as cannabis use becomes more mainstream that the FDA and or other federal, state and local governmental agencies will impose regulations covering the cultivation, purity, privacy, quality control, security and many other aspects of the industry, all of which will likely raise the cost of compliance thereby reducing profits or even making it more difficult to continue operations, either of which scenarios, if they occur, could have a negative impact on our business and operations.

 

Our limited resources may restrict our ability to manage any growth we may experience.

 

Growth of our business may place a significant strain on our management systems and resources and may require us to implement new operating and financial systems, procedures and controls. Our failure to manage our growth and expansion could adversely affect our business, results of operations and financial condition. Failure to implement new systems effectively or within a reasonable period of time could adversely affect our business, results of operations and financial condition. The Company is constantly looking to add additional qualified talent to the management team to support its growth, but there is no assurance we will be successful in identifying and/or hiring such people.

 

The market may not readily accept our products.

 

Demand and market acceptance for our licensed branded new cannabis infused products are subject to a high level of uncertainty. The successful introduction of any new product requires a focused, efficient strategy to create awareness of and desire for the products. For example, in order to achieve market acceptance for our marijuana products we will need to gain market and patient acceptance. Despite management’s efforts to gather data before introducing new products as a means to minimize the risk of product non-acceptance, no assurance can be given that our efforts will be successful.

 

Our marketing strategy may be unsuccessful and is subject to change as a result of a number of factors, including changes in market conditions (including the emergence of new market segments which in our judgment can be readily exploited through the use of our technology), the nature of possible license and distribution arrangements and strategic alliances which may become available to us in the future and general economic, regulatory and competitive factors. There can be no assurance that our strategy will result in successful product commercialization or that our efforts will result in initial or continued market acceptance for our proposed products.

 

 (9) 
 

 

If we are unable to protect our intellectual property rights, competitors may be able to use our technology or trademarks, which could weaken our competitive position.

 

We rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also intend to enter into confidentiality or license agreements with our employees, consultants and customers, and control access to and distribution of our products, and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products.

 

If we lose our key employee or fail to hire and retain other talented employees when necessary, our operations could be harmed.

 

The success of our business is currently dependent, in large part, on the personal efforts of Messrs. Robert Fireman, Jon R. Levine, and Timothy Shaw, our chief executive officer, chief financial officer, and chief operating officer, respectively. The loss of their services could have a material adverse effect on our business. The success of our business is currently dependent, in large part, upon our ability to hire and retain additional qualified management, marketing, technical, financial, and other personnel if and when our growth so requires. Competition for qualified personnel is intense and we may not be able to hire or retain such additional qualified personnel. Any inability to attract and retain qualified management and other personnel would have a material adverse effect on our ability to grow our business and operations.

 

In order to sustain and grow our business, we must be able to enhance our existing products and develop and introduce new products and services to respond to changing market demand.

 

The markets in which we operate are characterized by frequently changing customer demand and the introduction of new products and services. In order to be successful, we must be able to enhance our existing services and products and develop and introduce new products and services to respond to changing market demand. The development and enhancement of services and products entails significant risks, including:

 

  the failure to conform our services and products to evolving industry standards;
     
  the inability to develop, introduce and market enhancements to our existing services and products or new services and products on a timely basis; and
     
  the non-acceptance by the market of such new service and products.

 

We currently have only limited resources to enhance our technology or to develop new products.

 

 (10) 
 

 

We face competition from entities with greater resources than we have.

 

There is potential that the Company will face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and experience than the Company. Increased competition by larger and better-financed competitors could materially and adversely affect the business, financial condition, results of operations or prospects of the Company.

 

Because of the early stage of the industry in which the Company operates, the Company expects to face additional competition from new entrants. To become and remain competitive, the Company will require research and development, marketing, sales and support. The Company may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive basis which could materially and adversely affect the business, financial condition, results of operations or prospects of the Company.

 

The introduction of a recreational model for cannabis production and distribution may impact the medical marijuana market. The impact of this potential development may be negative for the Company, and could result in increased levels of competition in its existing medical market and/or the entry of new competitors in the overall cannabis market in which the Company operates.

 

A change in federal laws regarding the classification of cannabis as a controlled substance, interstate cannabis commerce, banking for entities in the cannabis industry, or other related regulations may have a significant influence on the Company’s business.

 

Results of clinical research, if unfavorable, could have a negative impact on the industries in which we operate and consequently on our business model.

 

Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis or isolated cannabinoids (such as CBD and THC) remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). Although the Company believes that the articles, reports and studies support its beliefs regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, future research and clinical trials may prove such statements to be incorrect, or could raise concerns regarding, and perceptions relating to, cannabis. Future research studies and clinical trials may reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to cannabis, which could have a material adverse effect on the demand for the Company’s products with the potential to lead to a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

 

Anti-money laundering laws and regulations can limit our ability to access financing and hamper our growth.

 

The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), the Criminal Code (Canada), as amended and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.

 

In February 2014, the Financial Crimes Enforcement Network (“FCEN”) of the U.S. Department of the Treasury issued a memorandum providing instructions to banks seeking to provide services to marijuana related businesses (the “FCEN Memo”). The FCEN Memo states that in some circumstances, it may not be appropriate to prosecute banks that provide services to marijuana-related businesses for violations of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on Cannabis-related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FCEN Memo. Under U.S. federal law, banks or other financial institutions that provide a Cannabis-related business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering, aiding and abetting, or conspiracy.

 

We face the prospect of claims of product liability if anyone is harmed by our products.

 

The Company’s products will be produced for sale directly to end consumers, and therefore there is an inherent risk of exposure to product liability claims, regulatory action and litigation if the products are alleged to have caused loss or injury. In addition, the production and sale of the Company’s products involves the risk of injury to end users due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human or animal consumption of the Company’s products alone or in combination with other medications or substances could occur. The Company may be subject to various product liability claims, including, among others, that its products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. While the Company has product liability insurance coverage in place and works with third party providers to ensure they do as well, a product liability claim or regulatory action against the Company could result in increased costs, could adversely affect the Company’s reputation, and could have a material adverse effect on its business and operational results.

 

We are subject to compliance with environmental regulations which can be onerous and costly.

 

The Company's operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations.

 

Government environmental approvals and permits are currently, and may in the future, be required in connection with the Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from implementing its proposed business activities or from proceeding with the development of its operations as currently proposed.

 

Failure to comply with applicable environmental laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage due to its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations which could have a material adverse effect on its business and operational results.

 

We are subject to potential risks related to, and arising from, acquiring companies.

 

The Company is in the process of acquiring several companies and intends to acquire other companies in the future. There are risks inherent in any such acquisition. Specifically, there could be unknown or undisclosed risks or liabilities of such companies for which the Company is not sufficiently indemnified. Any such unknown or undisclosed risks or liabilities could materially and adversely affect the Company’s financial performance and results of operations. The Company could encounter additional transaction and integration related costs or other factors such as the failure to realize all of the benefits from such acquisitions. All of these factors could cause dilution to the Company’s earnings per share or decrease or delay the anticipated accretive effect of the acquisition and cause a decrease in the market price of the Company’s securities. The Company may not be able to successfully integrate and combine the operations, personnel and technology infrastructure of any such acquired company with its existing operations. If integration is not managed successfully by the Company’s management, the Company may experience interruptions in its business activities, deterioration in its employee and customer relationships, increased costs of integration and harm to its reputation, all of which could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company may experience difficulties in combining corporate cultures, maintaining employee morale and retaining key employees. The integration of any such acquired companies may also impose substantial demands on the Management. There is no assurance that these acquisitions will be successfully integrated in a timely or cost-efficient manner, or at all.

 

In the event we are sued for any reason, we would face potential cost and interference with our business operations.

 

The Company is, and may from time to time become, party to litigation in the ordinary course of business which could adversely affect its business. Should any litigation in which the Company is, or becomes, involved be determined against the Company, such a decision could adversely affect the Company’s ability to continue operating. Even if the Company is involved in litigation and wins, litigation can redirect significant Company resources. Litigation may also create a negative perception of the Company’s brand.

 

 (11) 
 

 

Risks related to our common stock

 

Possible issuances of our capital stock would cause dilution to our existing shareholders.

 

We currently have approximately 212.4 million shares of common stock outstanding and we are authorized to issue up to 500 million shares. Therefore, we will be able to issue a substantial number of additional shares without obtaining shareholder approval. In the event we elect to issue additional shares of common stock in connection with any financing, acquisition or otherwise, current shareholders could find their holdings substantially diluted, which means they will own a smaller percentage of our company. In addition, we are authorized to issue up to 50 million shares of preferred stock that our board of directors can issue under any terms it wants and without any shareholder approval.

 

The exercise or conversion of outstanding warrants and options into common stock will dilute the percentage ownership of our other shareholders. The sale of such common stock or other common stock in the open market could adversely affect the market price of our common stock.

 

As of December 31, 2018, there were 8,310,000 and 10,606,211 of potentially dilutive securities in the form of options and warrants, respectively. Also as of such date, there were $350,000 of convertible promissory notes, and approximately $8.6 million of convertible debentures payable, that were potentially dilutive and whose conversion into common stock is based on a discount to the market value of common stock on or about the future conversion dates. More convertible securities will likely be granted in the future to our officers, directors, employees or consultants and as part of future financings. The exercise of outstanding stock options and warrants and conversion of notes and debentures will dilute the percentage ownership of our other shareholders. Sales, or the expectation of sales, of a substantial number of shares of our common stock in the private or public markets could adversely affect the prevailing market price of our common stock. 

 

Potential Volatility of Common Share Price

 

The market price of the Company’s common stock could be subject to significant fluctuations. Some of the factors that may cause the market price of the common stock to fluctuate include:

 

  (a) the public’s reaction to the Company’s press releases, announcements and filings with regulatory authorities and those of its competitors;
     
  (b) fluctuations in broader stock market prices and volumes;
     
  (c) changes in market valuations of similar companies;
     
  (d) investor perception of the Company, its prospects or the industry in general;
     
  (e) additions or departures of key personnel;
     
  (f) commencement of or involvement in litigation;
     
  (g) changes in the regulatory landscape applicable to the Company, the dietary supplement and/or the cannabis and hemp industries;
     
  (h) media reports, publications or public statements relating to, or public perceptions of, the regulatory landscape applicable to the Company, the cannabis or the hemp industry, whether correct or not;
     
  (i) announcements by the Company or its competitors of strategic alliances, significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments;
     
  (j) variations in the Company’s quarterly results of operations or cash flows or those of other comparable companies;
     
  (k) revenues and operating results failing to meet the expectations of securities analysts or investors in a particular period;

 

 (12) 
 

 

  (l) changes in the Company’s pricing policies or the pricing policies of its competitors;
     
  (m) future issuances and sales of the Company’s common stock;
     
  (n) sales of the Company’s common stock by insiders of the Company;
     
  (o) third party disclosure of significant short positions;
     
  (p) demand for and trading volume of the Company’s common stock;
     
  (q) changes in securities analysts’ recommendations and their estimates of the Company’s financial performance;
     
  (r) short-term fluctuation in stock price caused by changes in general conditions in the domestic and worldwide economies or financial markets; and
     
  (s) the other risk factors described in this section or other sections of this 10-K.

 

The realization of any of these risks and other factors beyond the Company’s control could cause the market price of the common stock to decline significantly.

 

In addition, broad market and industry factors may harm the market price of the Company’s common stock. Hence, the price of the common stock could fluctuate based upon factors that have little or nothing to do with the Company, and these fluctuations could materially reduce the price of the common stock regardless of the Company’s operating performance. In the past, following a significant decline in the market price of a company’s securities, there have been instances of securities class action litigation having been instituted against that company. If the Company were involved in any similar litigation, it could incur substantial costs, Management’s attention and resources could be diverted and it could harm the Company’s business, operating results and financial condition

 

The Company has no plans to pay dividends on our common stock.

 

We do not expect to declare or pay dividends on the common stock in the foreseeable future. In addition, the payment of cash dividends may be limited or prohibited by the terms of any future loan agreements.

 

We are subject to “penny stock” regulations which may adversely impact the liquidity and price of our common stock.

 

Our common stock is currently deemed a “penny stock.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information on penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell such securities to persons other than established customers and accredited investors (generally, those persons with assets in excess of $1,000,000 (excluding the value of their primary residence) or annual income exceeding $200,000 or $300,000 together with their spouse), the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.

 

These requirements could reduce the level of trading activity, if any, in the secondary market for our common stock. As a result of the foregoing, our shareholders may find it more difficult to sell their shares.

 

 (13) 
 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

Not Applicable.

 

ITEM 2. PROPERTIES.

 

The Company currently owns and leases the following properties throughout the United States.

 

Wilmington, Delaware

The Company owns a 45,000 square foot facility on 2.25 acres within a fenced-in business park which we purchased in September 2016 and developed into a cannabis cultivation, processing, and dispensary facility. The facility is leased to a cannabis licensee company occupying 100% of the space under a 20-year triple net lease expiring in 2035.

 

Lewes, Delaware

The Company leases 4,000 square feet of retail space in a newly-built multi-use building. This five-year lease with a five-year option to extend the term commenced in October 2016. We built out the space into a cannabis dispensary which is sub-leased to the same licensed cannabis company occupying the Wilmington facility, under a five-year triple net lease with a five-year option to extend.

 

Milford, Delaware

In March 2019, the Company entered into a lease of a 100,000 square foot warehouse that it intends to build into a cultivation and processing facility. The lease term is 10 years, with an option to extend the term for three additional five-year periods. Construction of the first 60,000 square feet has commenced and is estimated to be completed by October 2019.

 

Anna, Illinois

In March 2016, the Company finalized construction of a 3,400 square foot free-standing retail dispensary on an acre of land. The facility is leased to a licensed cannabis dispensary under a 20-year lease expiring in 2036.

 

Harrisburg, Illinois

The Company finalized construction on a 3,400 square foot free-standing retail dispensary on an acre of land in February of 2016. The facility is leased to the same licensed cannabis tenant occupying the Anna facility under a 20-year lease expiring in 2036.

 

Hagerstown, Maryland

In January 2017, the Company purchased a long-standing 180,000 square foot former manufacturing facility. The building, which had remained vacant over a decade, was rehabilitated by the Company into a cultivation and processing facility for a licensed cannabis tenant under a 20-year triple net lease that started in January 2018.

 

Clark, Nevada

The Company is leasing approximately 10,000 square feet of an industrial building that we built out into a cannabis cultivation facility. This facility is subleased to a licensed cannabis company under a sub-lease which is coterminous with the Company’s lease for 10 years expiring in 2024.

 

New Bedford, Massachusetts

In November 2017, the Company purchased a 138,000 square foot industrial property located on 21.95 acres within the New Bedford Industrial Park. Approximately half of the available square footage is leased to a non-cannabis manufacturing company under a five-year lease. The Company is developing the remaining half of the building into a cannabis cultivation and processing facility which is leased to ARL, our wholly-owned cannabis licensee under a 20-year triple net lease, the term of which will start after the completion of construction, which is estimated to occur in May 2019.

 

Middleborough, Massachusetts

In July 2017 the Company purchased a 22,700 square foot retail and warehouse building located on the main street of this municipality. We have constructed a 10,000 square foot retail dispensary which will be leased to the same cannabis licensee that leases our New Bedford facility under a 20-year lease starting mid-2019.

 

Norwood Massachusetts

The Company’s corporate offices are located in Norwood, Massachusetts. This 10,000 square foot space is under a 10-year lease expiring in 2028 with a related party which contain a 5-year extension option.

 

ITEM 3. LEGAL PROCEEDINGS.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

 (14) 
 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

The Company’s common stock began trading on the OTC Bulletin Board on May 2012 under the initial ticker symbol WORX. In June 2017, concurrent with the change of the Company name to MariMed Inc., the ticker symbol was changed to MRMD.

 

The Company’s common stock currently trades on the OTCQB market under the MRMD ticker symbol.

 

Stockholders

 

As of April 16, 2019, we had 745 shareholders of record and 212,425,383 outstanding shares of common stock.

 

Dividends

 

We have never declared or paid a dividend on our common stock, and we do not anticipate paying cash or other dividends in the foreseeable future.

 

Recent Sales of Unregistered Securities

 

All of the securities described below were issued to accredited investors in private transactions not involving a public offering or the payment of commissions, and were exempt from registration pursuant to Sections 4(2) and Regulation D of the Securities Act of 1933, as amended.

 

Common Stock

 

During the year ended December 31, 2018 the Company sold 19,188,980 shares of common stock at prices ranging from $0.50 to $3.00 per share, resulting in total proceeds of $31.8 million. Also during this period, the Company issued 3,420,526 shares of common stock in exchange for services rendered by third-parties or to otherwise settle outstanding obligations.

 

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. Also outstanding on such date were subscriptions on 18,000 shares of common stock, equivalent to an aggregate amount of $74,160, for the payment of rent for the months of September 2018 through January 2019 for a leased property in Massachusetts.

 

 (15) 
 

 

Stock Options

 

During the year ended December 31, 2018, the Company issued options to purchase 4.72 million shares of common stock at exercise prices ranging from $0.14 to $3.73 and expiring between December 2020 and November 2024.

 

During the year ended December 31, 2018, options to purchase 760,000 shares of common stock were exercised at exercise prices ranging from $0.08 to $0.63 per share. Of the total exercised, (i) 460,000 options were exercised on a cashless basis, with the exercise prices paid via the surrender of 105,398 shares of common stock, and (ii) 300,000 options were exercised resulting in aggregate exercise proceeds to the Company of $39,000.

 

Warrants

 

During the year ended December 31, 2018, the Company issued warrants to purchase 8,661,137 shares of common stock at exercise prices ranging from $0.20 to $5.50 per share. These warrants generally expire three or five years from issuance date.

 

During the year ended December 31, 2018, warrants to purchase 2,300,237 shares of common stock were exercised, at exercise prices ranging from $0.10 to $1.75 per share. Of the total exercised, (i) 1,000,000 warrants were exercised on a cashless basis, with the exercise prices paid via the surrender of 157,527 shares of common stock, and (ii) 1,300,237 were exercised providing the Company with exercise proceeds of approximately $384,000 in the aggregate.

 

Convertible Debt

 

In October and November 2018, as disclosed in the notes accompanying the Company’s audited financial statements, the Company sold an aggregate of $10,000,000 convertible debentures bearing interest 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 (the “$10M Debentures”).

 

The holder of the $10M 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).

 

 (16) 
 

 

Company Equity Compensation Plans

 

The following table sets forth information as of December 31, 2018 with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.

 

Plan Category 

Number of

securities to be

issued upon

exercise of

outstanding

options, warrants

and rights

  

Weighted-average
exercise price of
outstanding

options, warrants

and rights

  

Number of

securities

remaining available

for future

issuance under equity compensation plans

 
Equity compensation plans approved by stockholders           3,400,000   $                      0.24        0 
Equity compensation plans not approved by stockholders   4,445,000    $1.87     35,130,000 
Total   7,845,000          35,130,000 

 

In 2018, the Company’s board of directors adopted the 2018 Stock Award and Incentive Plan which allows for the grants of up to 40 million shares of options, restricted stock and/or other awards, as defined in the plan, with a limit to the number of incentive stock option grants. This plan shall be presented to the Company’s shareholders for approval at the next annual meeting of shareholders. The 4,445,000 securities to be issued under this plan were comprised of stock options granted to employees and directors of the Company from January 2018 to December 2018. Such options provide the grantees with the ability to purchase an aggregate of 4.445,000 shares of the Company’s common stock at exercise prices ranging from $0.14 to $3.725 per share, expiring three to five years from date of grant. 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Forward Looking Statements

 

When used in this form 10-K and in future filings by the Company with the Commission, words or phrases such as “anticipate,” “believe,” “could,” “would,” “should,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

 

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. These factors include, but are not limited to, changes that may occur to general economic and business conditions; changes in current pricing levels that we can charge for our services and products or which we pay to our suppliers and business partners; changes in political, social and economic conditions in the jurisdictions in which we operate; changes to regulations that pertain to our operations; changes in technology that render our technology relatively inferior, obsolete or more expensive compared to others; changes in the business prospects of our business partners and customers; increased competition, including from our business partners; and enforcement of federal cannabis related laws.

 

The following discussion should be read in conjunction with the financial statements and related notes which are included in this report under Item 8.

 

We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.

 

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Overview

 

General

 

We are a leader in the emerging legal cannabis industry. We provide ongoing management oversight and/or real estate services to independent cannabis-licensed operations in six states. We are experts in the development, operation, management and optimization of cannabis cultivation, production, and dispensing facilities.

 

During 2018, we made a strategic decision to transition from a professional management company that provides cannabis licensing, operational consulting, and real estate services, to a direct owner of cannabis licenses and an operator of seed-to-sale operations. During 2019 and beyond, we plan to acquire the cannabis licenses of the companies that we currently advise, and consolidate their operations under the MariMed banner. Additionally, we intent to leverage our success of providing management and operational oversight to expand into other states.

 

Currently, our facilities are leased to our cannabis-licensed clients. 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. In addition to these real estate services, we provide our clients with operational oversight, and 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 open or under development in the cities of Wilmington, Lewes, and Milford in Delaware; the cities of Anna and Harrisburg in Illinois; Clark county in Nevada; Arundel county and the city of Hagerstown in Maryland; and the cities of New Bedford, Norwood and Middleborough in Massachusetts. In total, we have developed in excess of 300,000 square feet of seed-to-sale cannabis facilities.

 

Please refer to the section above entitled Item 2. Properties for a description of our active and currently in-development facilities.

 

In addition to our advisory and real estate services, we are at the forefront of the development of 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, Betty’s Eddies™, the recently acquired recreational-leaning brand of fruit chews, and Nature’s Heritage™, the newest member of the MariMed family of brands, consisting of organic products created from the finest seed lineages which we believe are “The best cannabis Mother Earth has to offer®”.

 

The Company also has exclusive sublicensing rights in certain states to distribute vaporizer pens developed by Lucid Mood™, clinically-tested medicinal cannabis strains developed in Israel by world-renowned Tikun Olam™, Vitiprints™ printable dissolvable discs, and DabTabs™ revolutionary vaporization tablets infused with cannabis concentrates. The Company continues to be committed to the licensing and distribution of branded cannabis products in states across the country and beyond.

 

As of this filing, we have begun to execute on our strategy to evolve the Company into a direct cultivator, producer, and dispenser of cannabis and cannabis-related products, which we anticipate will significantly increase our revenues, profitability and overall operations. We have also made a significant investment in GenCanna, one of the top US producers of hemp-derived CBD. In January 2019, we established a new subsidiary focused solely on the development and distribution of CBD-infused products from hemp that, pursuant to the 2018 Farm Bill, have been removed as criminal under the Controlled Substances Act. The following paragraphs highlight our efforts to date, which include the progress made on our recently announced strategic initiative to consolidate the operations of our cannabis-licensed clients and to acquire cannabis licensees in other states.

 

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 AgriMed, an entity that holds a license from the state of Pennsylvania for the cultivation of cannabis and cannabis products that can be wholesaled to medical marijuana dispensaries within the state. In February 2019, the Company filed a complaint against AgriMed for specific performance of their obligations under the purchase agreement.

 

In August 2018, the Company entered into an exclusive global licensing agreement for the production and distribution rights in all existing and future legal cannabis markets of a proprietary technology that prints precision-dosed dissolvable cannabis products. This technology facilitates the production of 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 easily 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.

 

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During the period September to November 2018, pursuant to a subscription agreement, the Company purchased the “GC Debentures of GenCanna, a producer and distributor of agricultural hemp, CBD formulations, hemp genetics, and hemp products. The GC Debentures bear interest at a compounded rate of 9% per annum and mature three years from issuance. 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. Additionally, the Company was granted certain other rights including rights of inspection, financial information, and participation in future security offerings of 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 October 2018, the Company entered into a purchase agreement to acquire the ownership interests of the KPGs, the Company’s two cannabis-licensed clients that operate medical marijuana dispensaries in the state of Illinois, from the current ownership group of the KPGs (the “Sellers”). As part of this transaction, the Company will also acquire all of the minority interests of Mari-IL, the Company’s subsidiary which owns the real estate in which the KPGs’ dispensaries are located from the Sellers. 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 which is expected to be received by June 2019. 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, 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. In November 2018, the Company received written confirmation of legislative approval of the conversion plan from the state, making ARL a wholly-owned subsidiary of the Company. In conjunction with the approval of the conversion plan, the Company elected its current COO, Timothy Shaw, to serve as ARL’s sole board member.

 

In November 2018, the Company issued a letter of intent to acquire the ownership interests of The Harvest Foundation LLC, the Company’s cannabis-licensed client in the state of Nevada. The parties intend to negotiate a definitive agreement governing the acquisition as soon as practicable following the satisfactory completion of due diligence. The acquisition is conditioned upon the appropriate legislative approval of the transaction.

 

In December 2018 , the Company made a $500,000 investment in Iconic Ventures Inc based upon their revolutionary new product DabTabs™. MariMed 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 late 2019.

 

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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 these tenants.

 

Licensing – We derive licensing revenue from the sale of our branded precision-dosed cannabis-infused products, such as Kalm Fusion™ and Betty’s Eddies™, to legal dispensaries throughout the country.

 

Consulting – We assist third-parties in securing cannabis licenses, and provide advisory services in the areas of facility design and development, and cultivation and dispensing best practices

 

Supply Procurement – We have established large volume discounts with top national vendors of cultivation and production supplies and equipment, which we acquire and resell at competitive prices to our cannabis-licensed clients with a reasonable markup.

 

Product Sales – Commencing in the 2019 calendar year, after we receive legislative approval for the previously mentioned cannabis-licensee acquisitions in Illinois, Massachusetts, Nevada, and Maryland, we expect to consolidate such acquisitions, and start to generate revenues from the sales of medicinal and adult-use cannabis, hemp and related products derived from these plants.

 

Revenue generated by our dormant online portal business were negligible.

 

Expenses

 

We classify our expenses into three broad categories:

 

  cost of revenues, which includes the direct costs associated with the generation of our revenues;
     
  operating expenses, which include the sub-categories of personnel, marketing and promotion, and general and administrative; and
     
  non-operating expense, which include the sub-categories of interest, non-cash amortization of stock option and warrant issuances, and non-cash losses on debt settlements.

 

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Liquidity and Capital Resources

 

The Company raised nearly $45 million during the year ended December 31, 2018. This amount was comprised of $31.8 million from the sale of common stock, $9.9 million from the issuance of convertible debentures, and $3.0 million from the issuance of a promissory note. In addition, capital of approximately $2.0 million was extended to us for building improvements on our New Bedford, MA property by the terms of the secured lender.

 

Subsequent to December 31, 2018, the Company raised an additional $2.6 million from the sale of common stock and $6 million from the issuance of promissory notes due in January 2020.

 

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 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

 

Year ended December 31, 2018 compared to year ended December 31, 2017

 

Revenues for the year ended December 31, 2018 nearly doubled from the same period a year ago, increasing 95.3% from approximately $6.1 million to approximately $11.9 million. 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 provided to our cannabis-licensed client in Maryland 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. Revenue generated by these clients increased 51.1% from approximately $12.2 million in 2017 to approximately $18.5 million in 2018.

 

Cost of revenues increased from approximately $2.2 million for the year ended December 31, 2017 to approximately $4.0 million for the year ended December 31, 2018. As a percentage of revenue, however, cost of revenues decreased from 36.1% in 2017 to 34.1% in 2018, as we continue to leverage our infrastructure to generate higher margins. Accordingly, gross profit doubled year-over-year, increasing to $7.8 million, and as a percentage of revenue increased from 63.9% in 2017 to 65.9% in 2018.

 

Personnel expenses increased to approximately $1.3 million for the year ended December 31, 2018 from approximately $737,000 for the same period a year ago. Despite the increase in amount, which was the result of hiring additional staff to support the higher level of revenues, these expenses decreased as a percentage of revenues to 11.3% in 2018 from 12.1% in 2017.

 

Marketing and promotion costs increased to approximately $292,000 for the year ended December 31, 2018 from approximately $130,000 for the same period a year ago. The increase is due to a higher level of public relations undertaken by the Company, as well as a greater presence at industry tradeshows by the Company’s executives.

 

General and administrative costs increased to approximately $10.2 million for the year ended December 31, 2018 from approximately $2.9 million for the same period a year ago. This increase is primarily due to the amortization of stock option and warrant issuances of approximately $5.8 million in 2018, compared to $1.1 million in 2017. To explain further, financial accounting standards established by the Financial Accounting Standards Board for public and private companies that follow Generally Accepted Accounting Principles (also known as “GAAP”), require certain option and warrant issuances to be recorded at fair value and amortized to expense over the requisite service period associated with such issuances. This amortization expense is a “non-cash” expense in that the Company does not have to expend any cash for this expense. Accordingly, this expense has no effect on the liquidity of the Company. Excluding this non-cash expense, general and administrative costs increased to approximately $4.4 million for the year ended December 31, 2018 from approximately $1.8 million for the same period a year ago. This increase is due to (i) professional fees associated with the Company’s acquisitions, investments and financings, and (ii) utilities, real estate taxes, security, and other costs associated with operating an increased number of active facilities, commensurate with the growth of the business.

 

Goodwill writedowns, another non-cash expense as previously explained, was approximately $1.3 million for the year ended December 31, 2018. This amount is related to the excess consideration paid for the acquisitions of ARL, iRollie, and the assets of Betty’s Eddies™. Please refer to Note 3 – Acquisitions of our audited financial statements where these acquisitions are described in further detail.

 

As a result of the above, the Company incurred an operating loss of approximately $5.3 million for the year ended December 31, 2018, compared to operating income of approximately $128,000 for the same period in 2017. Excluding the aforementioned non-cash amortization expense on option and warrant issuances and goodwill writedowns, operating income increased 44.0% from approximately $1.2 million for the year ended December 31, 2017 to approximately $1.7 million for the year ended year December 31, 2018.

 

Non-operating expenses of approximately $8.0 million for the year ended December 31, 2018 were primarily comprised of (i) interest expense of approximately $4.4 million, which included approximately $1.7 million of interest on mortgages, notes and debentures payable; non-cash amortization of approximately $1.2 million of warrants that were issued to the purchasers of promissory notes and convertible debentures during 2018; and non-cash amortization of approximately $1.5 million of the beneficial conversion feature on the $10M Debentures, (ii) interest income of approximately $593,000 primarily from our purchase of the GC Debentures in 2018, and (iii) non-cash losses on the settlement of debt via the issuance of common stock of approximately $4.1 million. For the year ended December 31, 2017, non-operating expenses approximated $1.2 million and were comprised of (a) net interest expense of approximately $512,000, (b) net non-cash losses on debt settlement of approximately $645,000.

 

As a result of the foregoing, we realized a net loss of approximately $1.0 million for the year ended December 31, 2017, compared with a net loss of approximately $13.3 million in 2018. The net losses were due to the previously explained non-cash items which had no impact on the Company’s liquidity or cash flow. Excluding all non-cash items, net income for the years ended December 31, 2018 and 2017 was approximately $657,000 and $694,000, respectively. The calculation for net income excluding non-cash items is as follows:

 

Net Income Excluding Non-Cash Items  2018   2017 
   (Unaudited) 
Net loss  $(13,308,673)  $(1,029,062)
Non-cash items:          
Amortization of option and warrant issuances   5,760,617    1,078,253 
Loss on debt settlements, net   4,133,481    872,133 
Amortization of beneficial conversion feature   1,522,107    - 
Amortization of warrants   1,171,330    - 
Goodwill writedowns   1,331,785    - 
Equity in loss of investment   43,221    - 
Gain on sale of assets   2,858    - 
Gain on settlement of deferred revenue   -    (226,940)
Total non-cash items   13,965,399    1,723,446 
Net income excluding non-cash items   656,726    694,384 

 

Additionally, for the year ended December 31, 2018, the Company achieved adjusted EBITDA of $2.4 million, an increase of 53%, compared to $1.6 million for the same period a year ago. Please see the following section which further explains adjusted EBITDA.

 

Non-GAAP Financial Information – Adjusted EBITDA

 

We are providing a non-GAAP financial measurement of profitability – adjusted EBITDA – as a supplement to the preceding discussion of our financial results, which are based on our consolidated financial statements prepared in accordance with GAAP.

 

Management utilizes adjusted EBITDA internally in analyzing our financial achievements, operational performance, and liquidity. The presentation of adjusted EBITDA is not intended to be considered in isolation or as a substitute for the financial information prepared in accordance with GAAP.

 

We believe that both management and investors benefit from considering adjusted EBITDA in assessing our financial results and when planning, forecasting and analyzing future periods. Additionally, adjusted EBITDA provides investors and analysts with a key financial metric we use in making operating decisions, and is also a key metric used by investors and analysts themselves, along with other metrics, to assess the financial condition of a business.

 

EBITDA can be a useful supplemental measure to analyze the Company’s operations and liquidity, it does have limitations. Some limitations of 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.

 

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2019 Plans

 

Over the past year, many investors and potential partners have indicated to us that by consolidating ownership of our client operations, our strategy, position in the market, and financial statements would be made simpler, more transparent, and easier to understand from an investor perspective. As a result, we began in late 2018 a series of negotiated purchases of our client operators. Many of these transactions are still in process, and require approval from state authorities. It is our goal to complete this process in 2019. Please see section Consolidation Plans within ITEM 1. BUSINESS above.

 

In addition to completing this consolidation in 2019, we expect our focus to be on four key areas:

 

1)Driving operating revenue and profits across all the operating units, particularly in states like Massachusetts where the business is at an early stage.
   
2)Drive revenue and profits in MariMed Hemp by establishing brands and distribution across multiple channels.
   
3)Pursue expansion in the core cannabis business in states such as Michigan, Virginia, and Florida, to name a few.
   
  4) Expand licensed branded products into additional states and increase the related licensing fee stream.

 

Additionally, we agree with market analysts that the hemp-derived CBD market will grow rapidly. Although our success is far from certain, we intend to benefit from that growth, by our establishing MariMed Hemp, which is devoted to hemp-derived CBD products and which we expect will support and optimize our investment in GenCanna.

 

No assurances can be given that any of these plans will come to fruition or that if implemented will necessarily yield positive results.

 

The following transactions have occurred in early 2019:

 

GenCanna Debentures Conversion

 

In February 2019, the Company converted the entire $30 million investment in subordinated secured convertible debentures of GenCanna plus accrued interest through the conversion date into common stock of GenCanna equal to a 33.5% ownership interest on a fully diluted basis. As a result of the conversion, the Company will account for this investment in accordance with the equity method.

 

Also during this month, the Company’s CEO was appointed to GenCanna’s board.

 

Acquisitions

 

In February 2019, the Company contracted to purchase a 70% interest in Meditaurus LLC, a company established by Dr. Jokubas Ziburkas who holds a PhD in neuroscience and is a leading authority on hemp-based CBD and the endocannabinoid system. Meditaurus currently operates in the United States and Europe and has developed proprietary CBD formulations sold under its Florance brand.

 

Real Estate

 

In March 2019, the Company entered into a lease with an option to purchase a 100,000 square foot warehouse located in Milford, Delaware. The lease term is 10 years, with an option to extend the term for three additional five-year periods. Build-out of the first 60,000 square feet into a cultivation and processing facility has commenced, and is expected to be completed by October 2019.

 

Investment

 

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 of $300,000 in connection with the buildout of MHWC’s proposed dispensary location. MHWC issued a promissory note to the Company for the amount of the loan at a rate of 8% per annum that matures in January 2023, provided however, upon the two year anniversary of the date of final state approval of MHWC’s dispensing license, the Company shall have the right, subject to state approval, to convert the note into shares of MHWC’s common stock which shall be equivalent to 20% ownership of MWHC.

 

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Consulting Agreement

 

At the same time as the aforementioned investment in MHWC, the Company entered into a consulting services agreement with MHWC whereby the Company will provide advisory and oversight services to MHWC over a three-year period relating to the development, administration, operation, and management of MHWC's proposed dispensary in Maryland. The Company’s fee for such services shall be equal to 20% of MHWC’s net income of the business, as defined in the agreement.

 

Promissory Note Issuance

 

In March 2019, the Company raised $6 million from the issuance a of promissory note bearing interest at the rate of 10% per annum. This note is due and payable in January 2020.

 

Conversion of Note Receivable

 

In January, the Company’s note receivable balance of approximately $258,000 from Chooze Corp. was converted into a 2.7% ownership interest in Chooze. As of the conversion date, the Company will account for this investment in accordance with the provisions of ASC 321, Investments – Equity Securities.

 

Equity Transactions

 

  The Company sold 799,995 shares of common stock at a price of $3.25 per share resulting in aggregate proceeds of $2.6 million.
     
  Warrants to purchased 22,000 shares of common stock were exercised at exercise prices of $0.50 to $0.40. The Company received exercise proceeds of $15,800 from these exercises.
     
  Options to purchase 50,000 shares of common stock were exercised at an exercise price of $0.26 per share. The Company received exercise proceeds of $13,000 from this exercise.
     
  Options to purchase 350,000 shares of common stock were exercised on a cashless basis with the exercise prices paid via the surrender of 139,985 shares of common stock.
     
  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 at conversion prices ranging from $2.90 to $3.06 per share.
     
  The Company issued 97,136 shares of common stock associated with the same number common stock subscriptions outstanding on December 31, 2018.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Inflation

 

In the opinion of management, inflation has not had a material effect on the Company’s financial condition or results of its operations.

 

Seasonality

 

In the opinion of management, the Company’s financial condition and results of its operations are not materially impacted by seasonal sales.

 

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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 right-of-use lease assets and lease liabilities for operating leases and disclosing key information about leasing arrangements. The Company is currently implementing the requirements of Topic 842, which is effective for the Company starting on January 1, 2019. Most of the Company’s operating leases are subject to this new standard whose impact will be reflected by an increase in the Company’s total assets and total liabilities relative to such amount prior to adoption.

 

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. Topic 230 will be effective in 2019 and its impact is dependent upon the level of restricted cash of the Company, which at this time is insignificant.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) which simplifies goodwill impairment testing by requiring that such periodic testing be performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company is currently evaluating the impact of Topic 350 on its consolidated financial statements and related disclosures, which is effective for fiscal years, including interim periods, beginning after December 15, 2019.

 

In 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.

 

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ITEM 8. FINANCIAL STATEMENTS.

 

CONTENTS

 

Report of Independent Registered Public Accounting Firm – L&L CPAs, P.A. 26
   
Report of Independent Registered Public Accounting Firm – M&K CPAs, PLLC 27
   
Consolidated Balance Sheets 28
   
Consolidated Statements of Operations 29
   
Consolidated Statements of Stockholders’ Equity 30
   
Consolidated Statements of Cash Flows 31
   
Notes To Consolidated Financial Statements 32

 

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19720 Jetton Road, 3rd Floor

Cornelius, NC 28031

Tel: 704-897-8336

Fax: 704-919-5089

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

MariMed Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of MariMed Inc. (the “Company”) as of December 31, 2017 and related consolidated statements of operations, stockholders’ equity, and cash flows and the related notes (collectively referred to as the “financial statements”) for the December 31, 2017 year ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations, changes in stockholders’ deficit and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ L&L CPAS, PA  
L&L CPAS, PA  
Certified Public Accountants  
Cornelius, NC  
The United States of America  
April 2, 2018  

 

The firm served this client from November 2014 to November 2018.

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of MariMed Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of MariMed Inc. (the Company) as of December 31, 2018, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. The financial statements of MariMed Inc., as of December 31, 2017 were audited by other auditors, whose report dated April 2, 2018 expressed an unqualified opinion on those statements.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ M&K CPAS, PLLC

 

We have served as the Company’s auditor since 2018.

Houston, TX

April 16, 2019

 

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MariMed Inc.

Consolidated Balance Sheets

 

   December 31, 
   2018   2017 
Assets        
Current assets:          
Cash and cash equivalents  $4,104,315   $1,290,231 
Accounts receivable, net   5,376,966    1,453,484 
Deferred rents receivable   2,096,384    610,789 
Due from third parties   3,860,377    1,196,918 
Due from related parties   

-

    

15,000

 
Note receivable, current portion   51,462    45,444 
Other current assets   219,012    357,019 
Total current assets   

15,708,516

    

4,968,885

 
           
Property and equipment, net   34,099,864    25,954,931 
Intangibles   185,000    333,201 
Investments   1,672,163    - 
Note receivable, long-term portion   1,092,376    578,831 
Debentures receivable   30,000,000    - 
Due from related parties   

119,781

    

119,781

 
Other assets   82,924    246,386 
Total assets  $82,960,624   $32,202,015 
           
Liabilities and stockholders’ equity          
Current liabilities:          
Accounts payable  $3,915,430   $2,831,658 
Accrued expenses   1,588,368    1,405,336 
Deferred rents payable   105,901    - 
Due to related parties   276,311    400,996 
Mortgages payable, current portion   125,178    118,556 
Notes payable   3,877,701    10,665,899 
Total current liabilities   9,888,889    15,422,445 
           
Mortgages payable, long-term portion   7,411,634    5,532,397 
Debentures payable   3,557,440    - 
Other liabilities   338,200    240,013 
Total liabilities   21,196,163    21,194,855 
           
Stockholders’ equity:          
Series A convertible preferred stock, $0.001 par value; 50,000,000 shares authorized at December 31, 2018 and 2017; no shares issued or outstanding at December 31, 2018 and 2017   -    - 
Series A preferred stock subscribed but not issued; zero and 500,000 shares at December 31, 2018 and 2017, respectively   -    500 
Common stock, $0.001 par value; 500,000,000 shares authorized at December 31, 2018 and 2017; 211,013,043 and 176,850,331 shares issued and outstanding at December 31, 2018 and 2017, respectively   211,013    176,850 

Common stock subscribed but not issued; 97,136 and 1,000,000 shares at December 31, 2018 and 2017, respectively

   169,123    370,000 
Additional paid-in capital   

87,180,165

    

22,256,060

 
Accumulated deficit   (25,575,808)   (11,971,740)
Noncontrolling interests   (220,032)   175,490 
Total stockholders’ equity   61,764,461    11,007,160 
Total liabilities and stockholders’ equity  $82,960,624   $32,202,015 

 

See accompanying notes to consolidated financial statements.

 

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MariMed Inc.

Consolidated Statements of Operations

 

   Year Ended December 31, 
   2018   2017 
         
Revenues  $11,851,915   $6,067,853 
           
Cost of revenues   4,041,122    2,192,812 
           
Gross profit   7,810,793    3,875,041 
           
Operating expenses:          
Personnel   1,339,832    737,011 
Marketing and promotion   292,477    130,087 
General and administrative   10,202,731    2,880,293 
Goodwill writedowns   

1,331,785

    - 
Total operating expenses   13,166,825    3,747,391 
           
Operating income   (5,356,032)   127,650 
           
Non-operating expenses and (income):          
Interest expense   4,366,295    592,417 
Interest income   (593,214)   (80,898)
Loss on debt settlements, net   4,133,481    872,133 
Equity in loss of investment   43,221    - 
Other   2,858    (226,940)
Total non-operating expenses   7,952,641    1,156,712 
           
Net income (loss)   (13,308,673)   (1,029,062)
           
Net income (loss) attributable to noncontrolling interests   295,395    165,021 
Net income (loss) attributable to MariMed Inc.  $(13,604,068)  $(1,194,083)
           
Net income (loss) per share  $(0.071)  $(0.010)
           
Weighted average common shares outstanding   192,376,020    116,275,301 

 

See accompanying notes to consolidated financial statements.

 

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MariMed Inc.

Consolidated Statements of Stockholders’ Equity

 

   Series A
Convertible
Preferred
Stock
   Series A
Convertible
Preferred
Stock
Subscribed But
Not
Issued
   Common Stock   Common Stock
Subscribed But
Not Issued
   Additional
Paid-In
   Accumulated   Non-
controlling
   Total Stockholders’ 
   Shares   Par Value   Shares   Amount   Shares   Par Value   Shares   Amount   Capital   Deficit   Interest   Equity 
Balances at December 31, 2016       -   $          -    300,000   $300    64,074,683   $64,075   $400,000   $400   $9,604,435   $(10,777,657)  $557,006   $(551,441)
Subscribed Series A preferred stock             200,000    200                        199,800              200,000 
Sales of common stock                       26,672,228    26,671              6,551,329              6,578,000 
Equity issued to settle obligations                       1,007,597    1,008    (400,000)   (400)   327,964              328,571 
Option grants                                           73,902              73,902 
Exercise of options                       4,710,000    4,710              2,790              7,500 
Warrant issuances                                           1,004,351              1,004,351 
Purchase of subsidiary ownership interests                       75,000,000    75,000              (75,000)             - 
Sales of subsidiary ownership interests                                           1,118,807         31,193    1,150,000 
Betty’s Eddies™ Asset Purchase                                 1,000,000    370,000                   370,000 
Conversion of promissory notes                       4,385,823    4,386              2,758,683              2,763,069 
Settlement of promissory notes                       1,000,000    1,000              689,000              690,000 
Distributions                                                     (577,730)   (577,730)
Net income (loss)                                                (1,194,083)   165,021    (1,029,062)
Balances at December 31, 2017   -    -    500,000    500    176,850,331    176,850    1,000,000    370,000    22,256,060    (11,971,740)   175,490    11,007,160 
Conversion of Series A preferred stock             (500,000)   (500)   970,988    971              33,573              34,044 
Sales of common stock                       19,188,980    19,189              31,801,812              31,821,001 
Common stock issued for acquisitions                       642,575    643              1,194,918              1,195,561 
Equity issued to settle obligations                                 18,000    74,160                   74,160 
Issuance of subscribed shares                       1,000,000    1,000    (1,000,000)   (370,000)   369,000              - 
Equity issued for services                       3,420,526    3,421              3,671,697              3,675,118 
Equity conversion                       222,222    222              (222)             - 
Compensation expense on option and warrant issuances                                           5,760,617             5,760,617
Exercise of options                       654,602    655              38,435              39,000 
Exercise of warrants                       2,142,710    2,143              383,252              385,395 
Discount on debentures payable                                           

1,057,833

              

1,057,833

 
Discount on promissory notes                                           

1,709,595

              

1,709,595

 
Beneficial conversion feature on debentures
payable
                                           5,569,908              5,569,908 
Conversions of debentures
payable
                       524,360    524              1,434,982              1,435,506 
Conversions of promissory notes                       1,568,375    1,568              1,902,748              1,904,316 
Settlement of promissory notes                       3,827,374    3,827    79,136    94,963    9,996,048              10,094,838 
Distributions                                                     (690,917)   (690,917)
Net income (loss)                                                (13,604,068)   295,395    (13,308,673)
Balances at December 31, 2018   -   $-    -   $-    211,013,043   $211,013    97,136   $169,123   $87,180,165   $(25,575,808)  $(220,032)  $61,764,461 

 

See accompanying notes to consolidated financial statements.

 

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MariMed Inc.

Consolidated Statements of Cash Flows

 

    Year Ended December 31,  
    2018     2017  
Cash flows from operating activities:                
Net income (loss) attributable to MariMed Inc.   $ (13,604,068 )   $ (1,194,083 )
Net income (loss) attributable to noncontrolling interests     295,395       165,021  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                
Depreciation     657,854       362,691  
Bad debt expense     150,000       -  
Amortization of warrants     1,171,330       -  
Amortization of beneficial conversion feature     1,522,107       -  
Goodwill writedowns     1,331,785       -  
Loss on sale of fixed assets     (2,858 )     -  
Equity compensation     5,760,617       1,078,253  
Common stock issued for services     3,675,121       320,772  
Loss on preferred stock conversions     34,044       -  
Loss on promissory note conversions     829,316       451,115  
Loss on promissory note extinguishments     2,505,050       390,000  
Equity in loss of investment     43,221       -  
Changes in operating assets and liabilities:                
Accounts receivable, net     (4,073,482 )     (920,877 )
Deferred rents receivable     (1,485,595 )     (74,541 )
Due from third parties     (3,387,906 )     (640,238 )
Other current assets     156,547       (341,016 )
Other assets     163,462       (51,044 )
Accounts payable     963,083       2,359,493  
Accrued expenses     183,032       86,245  
Deferred rents payable     105,901       -  
Deferred revenue     -       (226,950 )
Other liabilities     98,187       -  
Net cash provided by (used in) operating activities     (2,907,857 )     1,764,841  
                 
Cash flows from investing activities:                
Purchase of property and equipment     (8,924,311 )     (20,975,763 )
Investment in convertible debentures     (30,000,000 )     -  
Investment in notes receivable     (565,116 )     -  
Investment in Iconic Ventures     (500,000 )     -  
Investment in Sprout     (300,000 )     -  
iRollie acquisition     13,494       -  
Proceeds from notes receivable     45,553       -  
Proceeds from sale of equipment     145,382       -  
Due from related parties     15,000       52,727  
Net cash used in investing activities     (40,069,998 )     (20,923,036 )
                 
Cash flows from financing activities:                
Proceeds from subscribed preferred stock     -       200,000  
Issuance of common stock     31,821,001       6,585,800  
Issuance of common stock subscriptions     55,620        
Issuance of interest in subsidiary     -       1,150,000  
Issuance of promissory notes     3,206,338       9,475,000  
Payments on promissory notes     (700,000 )     -  
Issuance of debentures     10,007,094       -  
Proceeds from mortgages     2,000,000       2,785,841  
Payments on mortgages     (114,141 )     -  
Exercise of stock options     39,000       7,500  
Exercise of warrants     385,395       -  
Due to related parties     (217,451     252,659  
Distributions     (690,917     (577,730 )
Net cash provided by financing activities    

45,791,939

      19,879,070  
                 
Net change to cash and cash equivalents     2,814,084       720,875  
Cash and cash equivalents at beginning of period     1,290,231       569,356  
Cash and cash equivalents at end of period   $ 4,104,315     $ 1,290,231  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 1,286,007     $ 586,584  
Cash paid for taxes   $ 12,584     $ 1,781  
                 
Non-cash activities:                
Equity issued to settle promissory notes   $ 7,589,788     $ 300,000  
Conversions of promissory notes   $ 1,075,000     $ 2,311,953  
Discount on promissory notes   $ 1,709,595     $ -  
Conversions of debentures payable   $ 1,435,506     $ -  
Beneficial conversion feature on debentures payable   $ 5,569,908     $ -  
Discount on debentures payable   $ 1,057,833     $ -  
Investment in Sprout   $ 915,006     $ -  
iRollie acquisition   $ 266,682     $    
Issuance of common stock associated with subscriptions   $ 370,000     $ -  
Subscriptions issued to acquire assets of Betty’s Eddies™   $ -     $ 370,000  
Issuance of common stock for prepaid rent   $ 18,540     $ -  

 

See accompanying notes to consolidated financial statements.

 

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MariMed Inc.

Notes to Consolidated Financial Statements

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

MariMed Inc. (the “Company”), a Delaware corporation, 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 over 300,000 square feet of seed-to-sale cannabis facilities across these five states.

 

In addition, the Company licenses precision-dosed, cannabis-infused products to treat specific medical conditions or to achieve a certain result. 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 vaporizer pens developed by Lucid Mood™, as well as the clinically-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. At inception, the Company had operated an online portal that offered multi-user virtual environments to users. These operations were effectively ceased in early 2014.

 

The Company has entered into several transactions to develop its business, and more recently to carry out its 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. These transactions are summarized below and disclosed in further detail in Note 3 – Acquisitions.  

 

In May 2014, the Company, through its subsidiary MariMed Advisors Inc., acquired Sigal Consulting LLC, a company operating in the cannabis industry. This transaction 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 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 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. In February 2019, the Company filed a complaint against this entity for specific performance of their obligations under the purchase agreement. 

 

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. As of December 31, 2018, the Company had not yet received legislative approval – required for all ownership changes of cannabis licensees – and therefore these entities 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

 

In October 2018, the Company’s cannabis-licensed client with cultivation and dispensary operations in Massachusetts, ARL Healthcare Inc. (“ARL”), filed a plan of entity conversion with the state to convert from a non-profit entity to a for-profit corporation, with the Company as the sole shareholder of the for-profit corporation. On November 30, 2018, the conversion plan was approved by the 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 transaction 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 legislature in 2019

 

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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

Certain reclassifications have been made to prior periods’ data to conform to the current period presentation. These reclassifications had no effect on consolidated income (losses) or cash flows.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements at December 31, 2018 and 2017 and for the years then ended include the accounts of MariMed Inc. and the following majority-owned subsidiaries.

 

Subsidiary:  Percentage Owned 
MariMed Advisors Inc.   100.0%
Mia Development LLC   89.5%
Mari Holdings IL LLC   60.0%
Mari Holdings MD LLC   97.4%
Mari Holdings NV LLC   100.0%
Hartwell Realty Holdings LLC   100.0%
iRollie LLC   100.0%
ARL Healthcare Inc.   100.0%

 

Intercompany transactions have been eliminated upon consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts within the financial statements and disclosures thereof. Actual results could differ from these estimates or assumptions.

 

Cash Equivalents

 

The Company considers all highly liquid investments with a maturity date of three months or less to be cash equivalents. The fair values of these investments approximate their carrying values.

 

The Company’s cash and cash equivalents are maintained with recognized financial institutions located in the United States. In the normal course of business, the Company may carry balances with certain financial institutions that exceed federally insured limits. The Company has not experienced losses on balances in excess of such limits and management believes the Company is not exposed to significant risks in that regard.

 

Accounts Receivable

 

Accounts receivable consist of trade receivables and are carried at their estimated collectible amounts.

 

The Company provides credit to its clients in the form of payment terms. The Company limits its credit risk by performing credit evaluations of its clients and maintaining a reserve, if deemed necessary, for potential credit losses. Such evaluations include the review of a client’s outstanding balances with consideration towards such client’s historical collection experience, as well as prevailing economic and market conditions and other factors. Based on such evaluations, the Company recorded a reserve of $150,000 at December 31, 2018.

 

The accounts receivable balances of two clients constituted 84% of total accounts receivable at December 31, 2018. The balances of these two clients represented 79% of total accounts receivable at December 31, 2017.

 

Investments

 

The Company classifies its investments as available-for-sale-investments. Investments are comprised of equity holding of private companies These investments are recorded at fair value on the Company’s consolidated balance sheet, with changes to fair value, if any, included in comprehensive income. Investments are evaluated for other-than-temporary impairment and are written down if such impairments are deemed to have occurred.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 606, Revenue from Contract with Customers, as amended by subsequently issued Accounting Standards Updates. This revenue standard requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. The recognition of revenue is determined by performing the following consecutive steps:

 

Identify the contract(s) with a customer;
Identify the performance obligations in the contract(s);
Determine the transaction price;
Allocate the transaction price to the performance obligations in the contract(s); and
Recognize revenue as the performance obligation is satisfied.

 

Additionally, when another party is involved in providing goods or services to the Company’s clients, a determination is made as to who—the Company or the other party—is acting in the capacity as the principal in the sale transaction, and who is merely the agent arranging for goods or services to be provided by the other party.

 

The Company is typically considered the principal if it controls the specified good or service before such good or service is transferred to its client. The Company may also be deemed to be the principal even if it engages another party (an agent) to satisfy some of the performance obligations on its behalf, provided the Company (i) takes on certain responsibilities, obligations and risks, (ii) possesses certain abilities and discretion, or (iii) other relevant indicators of the sale. If deemed an agent, the Company would not recognize revenue for the performance obligations it does not satisfy.

 

The adoption of this standard did not have a significant impact on the Company’s consolidated operating results, and accordingly no restatement has been made to prior period reported amounts.

 

The Company’s main sources of revenue are comprised of the following:

 

Real Estate – 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.

 

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.

 

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For the years ended December 31, 2018 and 2017, based on its impairment analyses, the Company did not have any impairment losses.

 

Impairment of Long-Lived Assets

 

The Company evaluates the recoverability of its fixed assets and other assets in accordance with ASC 360-10-15, Impairment or Disposal of Long-Lived Assets. Impairment of long-lived assets is recognized when the net book value of such assets exceeds their expected cash flows, in which case the assets are written down to fair value, which is determined based on discounted future cash flows or appraised values.

 

Fair Value of Financial Instruments

 

The Company follows the provisions of ASC 820, Fair Value Measurement, to measure the fair value of its financial instruments, and ASC 825, Financial Instruments, for disclosures on the fair value of its financial instruments. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by ASC 820 are:

 

Level 1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
   
Level 2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
   
Level 3 Pricing inputs that are generally observable inputs and not corroborated by market data.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their fair values due to the short maturity of these instruments.

 

The fair value of option and warrant issuances are determined using the Black-Scholes pricing model and employing several inputs such as the expected life of instrument, the exercise price, the expected risk-free interest rate, the expected dividend yield, the value of the Company’s common stock on issuance date, and the expected volatility of such common stock. The following table summarizes the range of inputs used by the Company during the prior two fiscal years:

 

    2018     2017  
Life of instrument     0.5 to 5.0 years       3.0 to 5.0 years  
Volatility factors     1.019 to 2.086       0.963 to 1.095  
Risk-free interest rates     1.65% to 3.07%       1.79% to 2.08%  
Dividend yield     0%       0%  

 

The expected life of an instrument is calculated using the simplified method pursuant to Staff Accounting Bulletin Topic 14, Share-Based Payment, which allows for using the mid-point between the vesting date and expiration date. The volatility factors are based on the historical two-year movement of the Company’s common stock prior to an instrument’s issuance date. The risk-free interest rate is based on U.S. Treasury rates with maturity periods similar to the expected instruments life on the issuance date.

 

The Company amortizes the fair value of option and warrant issuances on a straight-line basis over the requisite service period of each instrument.

 

Extinguishment of Liabilities

 

The Company accounts for extinguishment of liabilities in accordance with ASC 405-20, Extinguishments of Liabilities. When the conditions for extinguishment are met, the liabilities are written down to zero and a gain or loss is recognized.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation using the fair value method as set forth in ASC 718, Compensation—Stock Compensation, which requires a public entity to measure the cost of employee services received in exchange for an equity award based on the fair value of the award on the grant date, with limited exceptions. Such value will be incurred as compensation expense over the period an employee is required to provide service in exchange for the award, usually the vesting period. No compensation cost is recognized for equity awards for which employees do not render the requisite service.

 

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Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. The Company did not take any uncertain tax positions and had no adjustments to unrecognized income tax liabilities or benefits for the years ended December 31, 2018 and 2017.

 

Related Party Transactions

 

The Company follows ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.

 

In accordance with ASC 850, the Company’s financial statements include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business, as well as transactions that are eliminated in the preparation of financial statements.

 

Comprehensive Income

 

The Company reports comprehensive income and its components following guidance set forth by ASC 220, Comprehensive Income, which establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. There were no items of comprehensive income applicable to the Company during the period covered in the financial statements.

 

Earnings Per Share

 

Earnings per common share is computed pursuant to ASC 260, Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus the weighted average number of potentially dilutive securities during the period.

 

As of December 31, 2018 and 2017, there were 18,916,211 and 9,045,311, respectively, of potentially dilutive securities in the form of options and warrants. Also as of such dates, there were (i) zero and 500,000 shares, respectively, of subscriptions on convertible preferred stock, (ii) $3,350,000 and $1,350,000, respectively, of convertible promissory notes, and (iii) approximately $8.6 million and zero, respectively, of convertible debentures payable, that were potentially dilutive, and whose conversion into common stock is based on a discount to the market value of common stock on or about the future conversion date. For the years ended December 31, 2018 and 2017, 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. 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 evaluates the perceived merits of such proceedings or claims, and of the relief sought or expected to be sought.

 

If the assessment of a contingency indicates that it is probable that a material loss will be incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.

 

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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; 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 right-of-use lease assets and lease liabilities for operating leases and disclosing key information about leasing arrangements. The Company is currently implementing the requirements of Topic 842, which is effective for the Company starting on January 1, 2019. Most of the Company’s operating leases are subject to this new standard whose impact will be reflected by an increase in the Company’s total assets and total liabilities relative to such amount prior to adoption.

 

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. Topic 230 will be effective in 2019 and its impact is dependent upon the level of restricted cash of the Company, which at this time is insignificant.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) which simplifies goodwill impairment testing by requiring that such periodic testing be performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company is currently evaluating the impact of Topic 350 on its consolidated financial statements and related disclosures, which is effective for fiscal years, including interim periods, beginning after December 15, 2019.

 

In 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 $5.9 million, 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 Betty’s Eddies™, a brand of cannabis-infused fruit chews, from Icky Enterprises LLC, a company partially owned by an officer of the Company (“Icky”). The purchase price was $140,000 plus 1,000,000 shares of the Company’s common stock valued at $370,000 based on the price of the common stock on the issuance date. These shares of common stock were issued in June 2018, and accordingly, the shares were classified as Common Stock Subscribed But Not Issued on the December 31, 2017 balance sheet.

 

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 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 years ended December 31, 2018 and 2017, such royalties approximated $16,000 and $10,000, respectively.

 

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iRollie LLC

 

Effective April 2018, the Company entered into a purchase agreement whereby 264,317 shares of the Company’s common stock were exchanged for 100% of the ownership interests of iRollie LLC, a manufacturer of branded cannabis products and accessories for consumers, and custom product and packaging for companies in the cannabis industry. The Company acquired, among other assets, iRollie’s entire product line, service offerings, clients, and intellectual property, and hired its two co-founders.

 

The acquisition was accounted for in accordance with ASC 10. The shares of Company common stock valued at $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   180,000 
Accounts payable   (120,689)
Due to related parties   (92,765)
Total identifiable net assets   (7,454)
Goodwill   731,902 
Total fair value of consideration  $724,448 

 

The total consideration paid by the Company was equal to the forgiveness of amounts owed by the Company to ARL. Accordingly, the transaction gave rise to goodwill of approximately $732,000, which the Company wrote down.