UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the Quarterly Period ended
For the transition period from __________________ to __________________
Commission
File number
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) |
(Address of Principal Executive Offices)
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
| Title of each class | Ticker symbol(s) | Name of each exchange on which registered | ||
| Not Applicable. | Not Applicable. | Not Applicable. |
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.
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).
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 ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| 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 Exchange Act). Yes ☐
As of November 15, 2021, shares of the registrant’s common stock were outstanding.
MariMed Inc.
Table of Contents
| 2 |
MariMed Inc.
Condensed Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Deferred rents receivable | ||||||||
| Notes receivable, current portion | ||||||||
| Inventory | ||||||||
| Investments | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangibles, net | ||||||||
| Investments | - | |||||||
| Notes receivable, less current portion | ||||||||
| Right-of-use assets under operating leases | ||||||||
| Right-of-use assets under finance leases | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities, mezzanine equity, and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Sales and excise taxes payable | ||||||||
| Debentures payable | - | |||||||
| Notes payable, current portion | ||||||||
| Mortgages payable, current portion | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Finance lease liabilities, current portion | ||||||||
| Due to related parties | - | |||||||
| Other current liabilities | - | |||||||
| Total current liabilities | ||||||||
| Notes payable, less current portion | ||||||||
| Mortgages payable, less current portion | ||||||||
| Operating lease liabilities, less current portion | ||||||||
| Finance lease liabilities, less current portion | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Mezzanine equity: | ||||||||
| Series B convertible preferred stock, $ par value; shares authorized, issued and outstanding at September 30, 2021 and December 31, 2020 | ||||||||
| Series C convertible preferred stock, $ par value; and shares authorized, issued and outstanding at September 30, 2021 and December 31, 2020, respectively | - | |||||||
| Total mezzanine equity | ||||||||
| Stockholders’ equity: | ||||||||
| Undesignated preferred stock, $ par value; and shares authorized at September 30, 2021 and December 31, 2020, respectively; shares issued and outstanding at September 30, 2021 and December 31, 2020 | - | - | ||||||
| Common stock, $ par value; and shares authorized at September 30, 2021 and December 31, 2020, respectively; and shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | ||||||||
| Common stock subscribed but not issued; and shares at September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities, mezzanine equity, and stockholders’ equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| 3 |
MariMed Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Personnel | ||||||||||||||||
| Marketing and promotion | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Bad debts | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income | ||||||||||||||||
| Non-operating income (expenses): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Loss on obligations settled with equity | - | - | ( | ) | ( | ) | ||||||||||
| Equity in earnings of investments | - | - | ||||||||||||||
| Change in fair value of investments | ( | ) | ( | ) | ( | ) | ||||||||||
| Other | ( | ) | ( | ) | ||||||||||||
| Total non-operating income (expenses), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Provision for income taxes | - | - | ||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Net income (loss) attributable to noncontrolling interests | $ | $ | $ | $ | ||||||||||||
| Net income (loss) attributable to MariMed Inc. | $ | $ | $ | $ | ( | ) | ||||||||||
| Net income (loss) per share | ||||||||||||||||
| Basic | $ | $ | $ | $ | ( | ) | ||||||||||
| Diluted | $ | $ | $ | $ | ( | ) | ||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 4 |
MariMed Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| Common Stock | Common
Stock Subscribed But Not Issued | Additional Paid-In | Accumulated | Non- Controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Par Value | Shares | Amount | Capital | Deficit | Interests | Equity | |||||||||||||||||||||||||
| Balances at December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Issuance of subscribed shares | ( | ) | ( | ) | - | - | - | |||||||||||||||||||||||||
| Stock grants | - | - | ||||||||||||||||||||||||||||||
| Stock forfeiture | ( | ) | ( | ) | - | - | - | - | - | |||||||||||||||||||||||
| Amortization of option grants | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Issuance of stand-alone warrants | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Issuance of warrants attached to debt | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Discount on debentures payable | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Beneficial conversion feature on debentures payable | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Conversion of debentures payable | - | - | - | - | ||||||||||||||||||||||||||||
| Conversion of common stock to preferred stock | ( | ) | ( | ) | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||
| Conversion of promissory note | - | - | - | - | ||||||||||||||||||||||||||||
| Extinguishment of promissory note | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued to settle obligations | - | - | - | - | ||||||||||||||||||||||||||||
| Distributions | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balances at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Common Stock | Common
Stock Subscribed But Not Issued | Additional Paid-In | Accumulated | Non- Controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Par Value | Shares | Amount | Capital | Deficit | Interests | Equity | |||||||||||||||||||||||||
| Balances at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Issuance of subscribed shares | ( | ) | ( | ) | - | - | - | |||||||||||||||||||||||||
| Stock grants | - | - | ||||||||||||||||||||||||||||||
| Exercise of options | - | - | - | - | ||||||||||||||||||||||||||||
| Exercise of warrants | - | - | - | - | ||||||||||||||||||||||||||||
| Amortization of option grants | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Issuance of stand-alone warrants | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Issuance of warrants with stock | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Conversion of debentures payable | - | - | - | - | ||||||||||||||||||||||||||||
| Conversion of promissory notes | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued to settle obligations | - | - | - | - | ||||||||||||||||||||||||||||
| Purchase of property and equipment with stock | - | - | - | - | ||||||||||||||||||||||||||||
| Fees paid with stock | - | - | - | - | ||||||||||||||||||||||||||||
| Return of stock | ( | ) | ( | ) | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||
| Equity issuance costs | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||
| Acquisition of 30% interest in subsidiary | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Distributions | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net income | - | - | - | - | - | |||||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | $ | $ | $ |
( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
The above statements do not show columns for undesignated preferred stock
as the balances were zero and there was no activity in the reported periods.
See accompanying notes to condensed consolidated financial statements.
| 5 |
MariMed Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) attributable to MariMed Inc. | $ | $ | ( | ) | ||||
| Net income (loss) attributable to noncontrolling interests | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Asset writeoff | - | |||||||
| Amortization of intangibles | ||||||||
| Amortization of stock grants | ||||||||
| Amortization of option grants | ||||||||
| Amortization of stand-alone warrant issuances | ||||||||
| Amortization of warrants attached to debt | ||||||||
| Amortization of warrants issued with stock | - | |||||||
| Amortization of beneficial conversion feature | ||||||||
| Amortization of original issue discount | ||||||||
| Bad debt expense | ||||||||
| Fees paid with stock | - | |||||||
| Loss on obligations settled with equity | ||||||||
| Equity in earnings of investments | - | ( | ) | |||||
| Change in fair value of investments | ||||||||
| Gain on sale of investment | ( | ) | = | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Deferred rents receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Sales and excise taxes payable | ||||||||
| Operating lease payments, net | ( | ) | ||||||
| Finance lease interest payments | ||||||||
| Other current liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Purchase of cannabis licenses | ( | ) | ( | ) | ||||
| Return on investment | - | |||||||
| Interest on notes receivable | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of preferred stock | - | |||||||
| Equity issuance costs | ( | ) | - | |||||
| Proceeds from issuance of promissory notes | ||||||||
| Repayments of promissory notes | ( | ) | ( | ) | ||||
| Proceeds from issuance of debentures | - | |||||||
| Proceeds from mortgages | ||||||||
| Payments on mortgages | ( | ) | ( | ) | ||||
| Proceeds from exercise of options | - | |||||||
| Proceeds from exercise of warrants | - | |||||||
| Due to related parties | ( | ) | ( | ) | ||||
| Finance lease principal payments | ( | ) | ( | ) | ||||
| Distributions | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net change to cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash activities: | ||||||||
| Conversion of promissory notes | $ | $ | ||||||
| Conversions of debentures payable | $ | $ | ||||||
| Acquisition of | $ | $ | ||||||
| Purchase of property and equipment with stock | $ | $ | ||||||
| Operating lease right-of-use assets and liabilities | $ | $ | ||||||
| Common stock issued to settle obligations | $ | $ | ||||||
| Return of stock | $ | $ | ||||||
| Issuance of common stock associated with subscriptions | $ | $ | ||||||
| Cashless exercise of warrants | $ | $ | ||||||
| Cashless exercise of stock options | $ | $ | ||||||
| Exchange of common stock to preferred stock | $ | $ | ||||||
| Conversion of accrued interest to promissory notes | $ | $ | ||||||
| Discount on promissory notes | $ | $ | ||||||
| Beneficial conversion feature on debentures payable | $ | $ | ||||||
| Extinguishment of promissory note | $ | $ | ||||||
| Discount on debentures payable | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| 6 |
MariMed Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
MariMed
Inc. (the “Company”) is a multi-state operator in the United States cannabis industry. The Company develops, operates, manages,
and optimizes over
Upon its entry into the cannabis industry in 2014, the Company was an advisory firm that procured state-issued cannabis licenses on behalf of its clients, developed cannabis facilities which it leased to these newly-licensed companies, and provided industry-leading expertise and oversight in all aspects of their cannabis operations. The Company also provided its clients with ongoing regulatory, accounting, real estate, human resources, and administrative services.
More recently, the Company made the strategic decision to transition from a consulting business to a direct owner and operator of cannabis licenses in high-growth states. Core to this transition is the acquisition and consolidation of the Company’s clients (the “Consolidation Plan”). Among several benefits, the Consolidation Plan would present a simpler, more transparent financial picture of the full breadth of the Company’s efforts, with a clearer representation of the revenues, earnings, and other financial metrics the Company has generated for its clients. The Company has played a key role in the successes of these entities, from the securing of their cannabis licenses, to the development of facilities that are models of excellence, to funding their operations, and to providing operational and corporate guidance. Accordingly, the Company believes it is well suited to own these facilities and manage the continuing growth of their operations.
To date, acquisitions of its client businesses in Massachusetts and Illinois have been completed and establish the Company as a fully integrated seed-to-sale multi-state operator (“MSO”). The acquisitions of the remaining entities located in Maryland, Nevada, and Delaware are at various stages of completion and subject to each state’s laws governing the ownership transfer of cannabis licenses, which in the case of Delaware requires a modification of current cannabis ownership laws to permit for-profit ownership. Meanwhile, the Company continues to expand these businesses and maximize the Company’s revenue from rental income, management fees, and licensing royalties.
The transition to a fully integrated MSO is part of a strategic growth plan (the “Strategic Growth Plan”) the Company is implementing to drive its revenues and profitability. The Strategic Growth Plan has four components: (i) complete the Consolidation Plan, (ii) increase revenues in existing states, by spending capital to increase the Company’s cultivation and production capacity, and develop additional assets within those states, (iii) expand the Company’s footprint in additional legal cannabis states through new applications and acquisitions of existing cannabis businesses, and (iv) optimize the Company’s brand portfolio and licensing revenue, by creating products that meet specific customer needs, and distributing these products in states where cannabis has been legalized.
As to its products, the Company has created its own brands of cannabis flower, concentrates, and precision-dosed products utilizing proprietary strains and formulations. These products are developed by the Company in cooperation with state-licensed operators who meet the Company’s strict standards, including all natural—not artificial or synthetic—ingredients. The Company licenses its brands and product formulations only to certified manufacturing professionals who follow state cannabis laws and adhere to the Company’s precise scientific formulations and trademarked product recipes.
The Company utilizes proprietary cannabis genetics to produce high-quality flowers and concentrates under the award-winning3 Nature’s Heritage™ brand, and cannabis-infused products under the brand names Kalm Fusion®, in the form of chewable tablets and drink powder mixes, and the award-winning1 Betty’s Eddies® brand of all natural fruit chews. Both cannabis-infused brands are top-selling products in Maryland and Massachusetts2 and the Company intends to continue to introduce additional product lines under these brands in the foreseeable future.
The Company also has exclusive alliances with prominent brands. The Company has partnered with renown ice cream maker Emack & Bolio’s® to create a line-up of cannabis-infused vegan and dairy ice cream. Additionally, the Company has secured distribution rights for the Binske® line of cannabis products crafted from premium artisan ingredients, the Healer™ line of medical full-spectrum cannabis tinctures, and the clinically-tested medicinal cannabis strains developed in Israel by global medical cannabis research pioneer Tikun Olam™.
The Company’s stock is quoted on the OTCQX market under the ticker symbol MRMD.
The Company was incorporated in Delaware in January 2011 under the name Worlds Online Inc. Initially, the Company developed and managed online virtual worlds. By early 2014, this line of business effectively ceased operating, and the Company pivoted into the legal cannabis industry.
| 1 | LeafLink 2021 Best Selling Medical Product, LeafLink 2020 Industry Innovator, Explore Maryland Cannabis 2020 Edible of the Year, LeafLink 2019 Best Selling Medical Product. |
| 2 | Sources: BDSA 2021 and LeafLink Insights 2020. |
| 3 | LeafLink 2021 Fastest-Selling Concentrate. |
| 7 |
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
In accordance with GAAP, interim financial statements are not required to contain all of the disclosures normally required in annual financial statements. In addition, the results of operations of interim periods may not necessarily be indicative of the results of operations to be expected for the full year. Accordingly, these interim financial statements should be read in conjunction with the Company’s most recent audited annual financial statements and accompanying notes for the year ended December 31, 2020.
Certain reclassifications have been made to prior periods’ data to conform to the current period presentation. These reclassifications had no effect on reported income (losses) or cash flows.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of MariMed Inc. and the following majority-owned subsidiaries at September 30, 2021:
| Subsidiary: | Percentage Owned | ||
| MariMed Advisors Inc. | |||
| Mia Development LLC | |||
| Mari Holdings IL LLC | |||
| Mari Holdings MD LLC | |||
| Mari Holdings NV LLC | |||
| Mari Holdings Metropolis LLC | |||
| Mari Holdings Mt. Vernon LLC | |||
| Hartwell Realty Holdings LLC | |||
| iRollie LLC | |||
| ARL Healthcare Inc. | |||
| KPG of Anna LLC | |||
| KPG of Harrisburg LLC | |||
| MariMed Hemp Inc. | |||
| MediTaurus LLC | |||
Intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts within the financial statements and disclosures thereof. Actual results could differ from these estimates or assumptions.
Cash Equivalents
The Company considers all highly liquid investments with a maturity date of three months or less to be cash equivalents. The fair values of these investments approximate their carrying values.
The Company’s cash and cash equivalents are maintained with recognized financial institutions located in the United States. In the normal course of business, the Company may carry balances with certain financial institutions that exceed federally insured limits. The Company has not experienced losses on balances in excess of such limits and management believes the Company is not exposed to significant risks in that regard.
Accounts Receivable
Accounts receivable consist of trade receivables and are carried at their estimated collectible amounts.
The
Company provides credit to its clients in the form of payment terms. The Company limits its credit risk by performing credit evaluations
of its clients and maintaining a reserve, if deemed necessary, for potential credit losses. Such evaluations include the review of a
client’s outstanding balances with consideration towards such client’s historical collection experience, as well as prevailing
economic and market conditions and other factors. Based on such evaluations, the Company maintained a reserve of approximately $
| 8 |
Inventory
Inventory is carried at the lower of cost or net realizable value, with the cost being determined on a first-in, first-out (FIFO) basis. The Company allocates a certain percentage of overhead cost to its manufactured inventory; such allocation is based on square footage and other industry-standard criteria. The Company reviews physical inventory for obsolescence and/or excess and will record a write-down if necessary.
Investments
Investments are comprised of equity holdings in public and private companies. These investments are recorded at fair value on the Company’s consolidated balance sheet, with changes to fair value included in income. Investments are evaluated for permanent impairment and are written down if such impairments are deemed to have occurred.
Revenue Recognition
The Company recognizes revenue in accordance with 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 Company’s main sources of revenue are comprised of the following:
| ● | Product Sales – direct sales of cannabis and cannabis-infused products by the Company’s retail dispensaries and wholesale operations in Massachusetts and Illinois, and sales of hemp and hemp-infused products. An increase in product sales is expected from the Company’s planned cannabis-licensee acquisitions in Maryland, Nevada, and Delaware (upon this state’s amendment to permit for-profit ownership of cannabis entities). This revenue is recognized when products are delivered or at retail points-of-sale. | |
| ● | Real Estate – rental income and additional rental fees generated from leasing of the Company’s state-of-the-art, regulatory-compliant cannabis facilities to its cannabis-licensed clients. 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 specified amounts. | |
| ● | Management – fees for providing the Company’s cannabis clients with comprehensive oversight of their cannabis cultivation, production, and dispensary operations. These fees are based on a percentage of such clients’ revenue and are recognized after services have been performed. | |
| ● | Supply Procurement – the Company maintains volume discounts with top national vendors of cultivation and production resources, supplies, and equipment, which the Company acquires and resells to its clients or third parties within the cannabis industry. The Company recognizes this revenue after the delivery and acceptance of goods by the purchaser. | |
| ● | Licensing – royalties from the licensed distribution of the Company’s branded products including Kalm Fusion® and Betty’s Eddies®, and from sublicensing of contracted brands including Healer and Tikun Olam, to regulated dispensaries throughout the United States and Puerto Rico. The recognition of this revenue occurs when the products are delivered. |
| 9 |
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,
The Company’s property and equipment are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from the undiscounted future cash flows of such asset over the anticipated holding period. An impairment loss is measured by the excess of the asset’s carrying amount over its estimated fair value.
Impairment analyses are based on management’s current plans, asset holding periods, and currently available market information. If these criteria change, the Company’s evaluation of impairment losses may be different and could have a material impact to the consolidated financial statements.
For the nine months ended September 30, 2021 and 2020, based on the results of management’s impairment analyses, there were no impairment losses.
Leases
The consolidated financial statements reflect the Company’s adoption of ASC 842, Leases, as amended by subsequent accounting standards updates, utilizing the modified retrospective transition approach.
ASC 842 is intended to improve financial reporting of leasing transactions. The most prominent change from previous accounting guidance is the requirement to recognize right-of-use assets and lease liabilities on the consolidated balance sheet representing the rights and obligations created by operating leases that extend more than twelve months in which the Company is the lessee. The Company elected the package of practical expedients permitted under ASC 842. Accordingly, the Company accounted for its existing operating leases that commenced before the effective date as operating leases under the new guidance without reassessing (i) whether the contracts contain a lease, (ii) the classification of the leases, and (iii) the accounting for indirect costs as defined in ASC 842.
The Company determines if an arrangement is a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Non-lease components within lease agreements are accounted for separately. Right-of-use assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term, utilizing the Company’s incremental borrowing rate. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its fixed assets and other assets in accordance with ASC 360-10-15, Impairment or Disposal of Long-Lived Assets. Impairment of long-lived assets is recognized when the net book value of such assets exceeds their expected cash flows, in which case the assets are written down to fair value, which is determined based on discounted future cash flows or appraised values.
Fair Value of Financial Instruments
The Company follows the provisions of ASC 820, Fair Value Measurement, to measure the fair value of its financial instruments, and ASC 825, Financial Instruments, for disclosures on the fair value of its financial instruments. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by ASC 820 are:
| Level 1 | Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. |
| Level 2 | Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. |
| Level 3 | Pricing inputs that are generally observable inputs and not corroborated by market data. |
| 10 |
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 nine months ended September 30, 2021 and 2020:
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Life of instrument | to years | to years | ||||||
| Volatility factors | to | to | ||||||
| Risk-free interest rates | % to % | % to % | ||||||
| Dividend yield | % | % | ||||||
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.
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.
| 11 |
Income Taxes
The Company uses the asset and liability method to account for income taxes in accordance with ASC 740, Income Taxes. Under this method, deferred income tax assets and liabilities are recorded for the future tax consequences of differences between the tax basis and financial reporting basis of assets and liabilities, measured using 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
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 common share is computed pursuant to ASC 260, Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus the weighted average number of potentially dilutive securities during the period.
As of September 30, 2021 and 2020, there were potentially dilutive securities convertible into shares of common stock comprised of (i) stock options – convertible into and shares, respectively, (ii) warrants – convertible into and shares, respectively, (iii) Series B preferred stock – convertible into shares in both periods, (iv) Series C preferred stock – convertible into and shares, respectively, (v) debentures payable – convertible into and shares, respectively, and (vi) promissory notes – convertible into and shares, respectively.
For the three and nine months ended September 30, 2021, the aforementioned potentially dilutive securities increased the number of weighted average common shares outstanding on a diluted basis by shares and shares, respectively. For the three months ended September 30, 2020, the aforementioned potentially dilutive securities increased the number of weighted average common shares outstanding on a diluted basis by shares. Such shares were reflected in the calculation of diluted net income per share for such periods. For the nine months ended September 30, 2020, the potentially dilutive securities had an anti-dilutive effect on earnings per share, and pursuant to ASC 260, were excluded from the diluted net income per share calculations, resulting in identical basic and fully diluted net income per share for that period.
Commitments and Contingencies
The Company follows ASC 450, Contingencies, which requires the Company to assess the likelihood that a loss will be incurred from the occurrence or non-occurrence of one or more future events. Such assessment inherently involves an exercise of judgment. In assessing possible loss contingencies from legal proceedings or unasserted claims, the Company evaluates the perceived merits of such proceedings or claims, and of the relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a material loss will be incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
While not assured, management does not believe, based upon information available at this time, that a loss contingency will have material adverse effect on the Company’s financial position, results of operations or cash flows.
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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, is recorded in equity, with an offsetting discount to the carrying amount of convertible debt to which it is attached. The discount is amortized to interest expense over the life of the debt with adjustments to amortization upon full or partial conversions of the debt.
Risk and Uncertainties
The Company is subject to risks common to companies operating within the legal and medical marijuana industries, including, but not limited to, federal laws, government regulations and jurisdictional laws.
Noncontrolling Interests
Noncontrolling interests represent third-party minority ownership of the Company’s consolidated subsidiaries. Net income attributable to noncontrolling interests is shown in the consolidated statements of operations; and the value of net assets owned by noncontrolling interests are presented as a component of equity within the balance sheets.
Off Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
| 13 |
NOTE 3 – ACQUISITIONS
The Harvest Foundation LLC
In
2019, the Company entered into a purchase agreement to acquire
The
purchase price is comprised of the issuance of (i) shares of the Company’s common stock, in the aggregate, to two owners
of Harvest, which as a good faith deposit, were issued upon execution of the purchase agreement, (ii) $
Kind Therapeutics USA Inc.
In
the fall of 2016, the members of Kind Therapeutics USA Inc., the Company’s cannabis-licensed client in Maryland that holds licenses
for the cultivation, production, and dispensing of medical cannabis (“Kind”), and the Company agreed to a partnership/joint
venture whereby Kind would be owned
Also
in December 2018, (i) MariMed Advisors Inc., the Company’s wholly owned subsidiary, and Kind entered into a management services
agreement to provide Kind with comprehensive management services in connection with the business and operations of Kind (“the MSA”),
and (ii) Mari Holdings MD LLC, the Company’s majority-owned subsidiary, entered into a
In 2019, the members of Kind sought to renegotiate the terms of the MOU and have subsequently sought to renege on both the original partnership/joint venture and the MOU. The Company engaged with Kind in good faith in an attempt to reach updated terms acceptable to both parties, however Kind failed to reciprocate in good faith, resulting in an impasse. Incrementally, both parties through counsel further sought to resolve the impasse, however such initiative resulted in both parties commencing legal proceedings. As a result, the consummation of this acquisition has been delayed and may not ultimately be completed. The litigation is further discussed in Note 20 – Commitments and Contingencies.
MediTaurus LLC
In
2019, the Company acquired a
In
September 2021, the Company acquired the remaining
| 14 |
NOTE 4 – INVESTMENTS
At September 30, 2021 and December 31, 2020, the Company’s investments were comprised of the following:
September 30, 2021 | December 31, 2020 | |||||||
| Current investments: | ||||||||
| Flowr Corp. (formerly Terrace Inc.) | $ | $ | ||||||
| Non-current investments: | ||||||||
| MembersRSVP LLC | ||||||||
| Total investments | $ | $ | ||||||
Flowr Corp. (formerly Terrace Inc.)
In
December 2020, Terrace Inc., a Canadian cannabis entity in which the Company had an ownership interest of
This
investment is carried at fair value. During the nine months ended September 30, 2021 and 2020, the decrease in fair value of this
investment of approximately $
MembersRSVP LLC
In
August 2018, the Company invested $
During
the nine months ended September 30, 2020, the investment was accounted for under the equity method. Based on the Company’s equity
in MRSVP’s net loss during such period, the Company recorded earnings for the three months and nine month ended September 30, 2020
of approximately $
In
January 2021, the Company and MRSVP entered into an agreement whereby the Company assigned and transferred membership interests comprising
an
As
part of the agreement, the Company relinquished its right to appoint a member to the board of MRSVP. In light of the Company no longer
having the ability to exercise significant influence over MRSVP, the Company discontinued accounting for this investment under the equity
method as of January 1, 2021. The Company’s share of MRSVP’s net losses recorded under the equity method prior to January
1, 2020 of approximately $
In
September 2021, MRSVP sold substantially all of its assets pursuant to an asset purchase agreement dated as of August 31, 2021, and
entered into several related agreements. In furtherance of the transaction, the Company received cash proceeds of $
As
of September 30, 2021, the Company had received the cash consideration, and accordingly, reduced the investment balance to zero and recorded
a gain of approximately $
| 15 |
NOTE 5 – DEFERRED RENTS RECEIVABLE
The Company is the lessor under operating leases which contain rent holidays, escalating rents over time, options to renew, requirements to pay property taxes, insurance and/or maintenance costs, and contingent rental payments based on a percentage of monthly tenant revenues. The Company is not the lessor under any finance leases.
The Company recognizes fixed rental receipts from such lease agreements on a straight-line basis over the expected lease term. Differences between amounts received and amounts recognized are recorded under Deferred Rents Receivable on the balance sheet. Contingent rentals are recognized only after tenants’ revenues are finalized and if such revenues exceed certain minimum levels.
The Company leases the following owned properties:
| ● | Delaware
– a | |
| ● | Maryland
– a | |
| ● | Massachusetts
– a |
The Company subleases the following properties:
| ● | Delaware
– | |
| ● | Delaware
– a | |
| ● | Delaware
– a |
As
of September 30, 2021 and December 31, 2020, cumulative fixed rental receipts under such leases approximated $
Future minimum rental receipts for non-cancelable leases and subleases as of September 30, 2021 were:
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | $ |
| 16 |
NOTE 6 – NOTES RECEIVABLE
At September 30, 2021 and December 31, 2020, notes receivable, including accrued interest, consisted of the following:
September 30, 2021 | December 31, 2020 | |||||||
| First State Compassion Center | $ | $ | ||||||
| Healer LLC | ||||||||
| High Fidelity Inc. | ||||||||
| Total notes receivable | ||||||||
| Notes receivable, current portion | ||||||||
| Notes receivable, less current portion | $ | $ | ||||||
First State Compassion Center
The
Company’s cannabis-licensed client in Delaware, First State Compassion Center, issued a
Healer LLC
In
2018 and 2019, the Company loaned an aggregate of $
In
March 2021, the Company was issued a revised promissory note from Healer in the principal amount of approximately $
Additionally,
the Company has the right to offset any licensing fees owed to Healer by the Company in the event Healer fails to make any payment
when due. In March 2021, the Company offset approximately $
At
September 30, 2021 and December 31, 2020, the total amount of principal and accrued interest due under the aforementioned promissory
notes approximated $
High Fidelity
In
August 2019, the Company loaned $
| 17 |
NOTE 7 – INVENTORY
At September 30, 2021 and December 31, 2020, inventory was comprised of the following:
September 30, 2021 | December 31, 2020 | |||||||
| Plants | $ | $ | ||||||
| Ingredients and other raw materials | ||||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total inventory | $ | $ | ||||||
NOTE 8 – PROPERTY AND EQUIPMENT
At September 30, 2021 and December 31, 2020, property and equipment consisted of the following:
September 30, 2021 | December 31, 2020 | |||||||
| Land | $ | $ | ||||||
| Buildings and building improvements | ||||||||
| Tenant improvements | ||||||||
| Furniture and fixtures | ||||||||
| Machinery and equipment | ||||||||
| Construction in progress | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
During
the nine months ended September 30, 2021 and December 31, 2020, additions to property and equipment approximated $
The 2021 additions were primarily comprised of (i) the development of the facility in Metropolis, IL, and (ii) purchases of building improvements, machinery, and equipment at the facilities in Hagerstown, MD and New Bedford, MA. The 2020 additions consisted primarily of (i) the commencement of construction in Mt. Vernon, IL, and (ii) machinery and equipment purchases for facilities in Massachusetts, Maryland, Illinois, and Delaware.
The
construction in progress balances of approximately $
Depreciation
expense for the nine months ended September 30, 2021 and 2020 approximated $
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NOTE 9 – INTANGIBLES
At September 30, 2021 and December 31, 2020, intangible assets were comprised of (i) the carrying value of cannabis license fees, and (ii) goodwill arising from the Company’s acquisitions.
The
Company’s cannabis licenses are issued from the states of Illinois and Massachusetts and require the payment of annual fees. These
fees, comprised of a fixed component and a variable component based on the level of operations, are capitalized and amortized over the
respective twelve-month periods. At September 30, 2021 and December 31, 2020, the carrying value of these cannabis licenses approximated
$
The
goodwill associated with acquisitions is reviewed on a quarterly basis for impairment. Based on this review and other factors, the goodwill
of approximately $
NOTE 10 – MORTGAGES
At September 30, 2021 and December 31, 2020, mortgage balances, including accrued interest, were comprised of the following:
September 30, 2021 | December 31, 2020 | |||||||
Bank of New England – New Bedford, MA and Middleboro, MA properties | $ | $ | ||||||
Bank of New England – Wilmington, DE property | ||||||||
DuQuoin State Bank – Anna, IL and Harrisburg, IL properties | ||||||||
DuQuoin State Bank – Metropolis, IL property | ||||||||
South Porte Bank – Mt. Vernon, IL property | ||||||||
| Total mortgages payable | ||||||||
| Mortgages payable, current portion | ( | ) | ( | ) | ||||
| Mortgages payable, less current portion | $ | $ | ||||||
In
November 2017, the Company entered into a
The
Company maintains another mortgage with Bank of New England for the 2016 purchase of a
| 19 |
In
May 2016, the Company entered into a mortgage agreement with DuQuoin State Bank (“DSB”) for the purchase of properties in
Anna, IL and Harrisburg, IL which the Company developed into two
In
July 2021, the Company purchased the land and building in which it operates its cannabis dispensary in Metropolis, IL. The purchase price
consisted of
In
February 2020, the Company entered into a mortgage agreement with South Porte Bank for the purchase and development of a property in
Mt. Vernon, IL. Pursuant to the amended mortgage agreement, the mortgage shall be repaid in monthly installments of principal and interest
of approximately $
NOTE 11 – PROMISSORY NOTES
Promissory Notes Issued by the Company and its MariMed Hemp Inc. Subsidiary
In
June 2019, the Company and MariMed Hemp Inc., its wholly-owned subsidiary (“MMH”), issued a secured promissory note in the
principal amount of $
As
part of the $10M Note transaction, the Company issued -year warrants to purchase up to
The
Company entered into an amendment agreement with the Noteholder in February 2020, whereby the Company and MMH issued an amended and restated
promissory note
The
Company entered into a second amendment agreement with the Noteholder in June 2020, whereby (i) $
The
Company made a required principal payment of $
The
Noteholder had the option to convert the $8.8M Note, in whole or in part, into shares of the Company’s common stock at a conversion
price of $
The
Company entered into a third amendment agreement with the Noteholder in April 2021 whereby the Company and MMH issued a third amended
and restated promissory note in the principal amount of approximately $
On
or after the one-year anniversary of the $3.2M Note, upon twenty days prior written notice to the Noteholder, the Company can prepay
all of the outstanding principal and unpaid interest of the $3.2M Note, along with a prepayment premium equal to
In
2021, the Noteholder converted approximately $
| 20 |
Promissory Notes Issued Pursuant to an Exchange Agreement
In
February 2020, pursuant to an exchange agreement as further described in Note 13 – Mezzanine Equity, the Company issued
two promissory notes in the aggregate principal amount of approximately $
Promissory Note Issued by MMH
In
April 2019, MMH issued a secured promissory note in the principal amount of $
Promissory Notes Issued for Operating Liquidity
In
March 2019, the Company raised $
The
Company and the Holding Party entered into a note extension agreement in April 2020 (the “Initial Extension Agreement”) pursuant
to which (i) the $6M Note’s due date was extended to September 2020, and the $6M Note was modified to include unpaid accrued interest
of $
Previous
to the $6M Note, the Company raised $
| 21 |
The
Company and the Holding Party entered into a second note extension agreement in October 2020 (the “Second Extension Agreement”)
whereby the Company (i) paid $
In
consideration of the Second Extension Agreement, the Company (i) issued four-year warrants to the Holding Party’s designees to
purchase up to
The
Company made a required principal payment of $
Promissory Notes Issued to Purchase Commercial Vehicles
In
August 2020, the Company entered into a note agreement with First Citizens’ Federal Credit Union for the purchase of a commercial
vehicle. The note bears interest at a rate of
In
June 2021, the Company entered into a note agreement with Ally Financial for the purchase of a second commercial vehicle. The note bears
interest at the rate of
Other Promissory Note Issuances
In
addition to the above transactions, at the start of 2020, the Company was carrying $
| 22 |
Debt Maturities
As of September 30, 2021, the aggregate scheduled maturities of the Company’s total debt outstanding were:
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | ||||
| Less discounts | ( | ) | ||
| $ |
NOTE 12 – DEBENTURES PAYABLE
In
a series of transactions from the period October 2018 through February 2020, the Company sold an aggregate of $
Issue Date | Maturity Date | Initial Principal | Interest Rate | Issue Discount | Warrant Discount | Beneficial Conversion Feature | Converted To Common Stock | ||||||||||||
| $ | $ | $ | $ | ||||||||||||||||
As
of September 30, 2021, the holder of the $21M Debentures (the “Holder”) had converted all of the $21M Debentures, along with
accrued interest, into the Company’s common stock at conversion prices equal to
All
of the aforementioned conversions were effected in accordance with the terms of the debenture agreements, and therefore the Company was
not required to record a gain or loss on such conversions. The conversions were limited in any given month to certain agreed-upon amounts
based on the conversion price, and the Holder was also limited from beneficially owning more than
In
conjunction with the issuance of the $21M Debentures, the Company issued the Holder
| 23 |
Based
on the conversion prices of the $21M Debentures in relation to the market value of the Company’s common stock, the $21M Debentures
provided the Holder with a beneficial conversion feature, as the embedded conversion option was in-the-money on the commitment date.
The aggregate intrinsic value of the beneficial conversion feature of approximately $
Pursuant to the terms of a registration rights agreement with the Holder, entered into concurrently with the SPA, the Company agreed to provide the Holder with certain registration rights with respect to shares issued pursuant to the terms of the SPA and the $21M Debentures.
During
the year ended December 31, 2020, amortization of the beneficial conversion features, after adjustment for the aforementioned conversions,
approximated $
During
the nine months ended September 30, 2021, amortization of the beneficial conversion features, after adjustment for the aforementioned
conversions, approximated $
| 24 |
NOTE 13 – MEZZANINE EQUITY
Series B Convertible Preferred Stock
In February 2020, the Company entered into an exchange agreement with two institutional shareholders (the “TIS Exchange Agreement”) whereby the Company (i) exchanged shares of the Company’s common stock previously acquired by the two institutional shareholders for an equal number of shares of newly designated Series B convertible preferred stock, and (ii) issued the $4.4M Notes previously discussed in Note 11 – Promissory Notes.
In connection with the TIS Exchange Agreement, the Company filed (i) a certificate of designation with respect to the rights and preferences of the Series B convertible preferred stock, and (ii) a certificate of elimination to return all shares of the Series A convertible preferred stock, of which no shares were issued or outstanding at the time of filing, to the status of authorized and unissued shares of undesignated preferred stock.
The holders of Series B convertible preferred stock (the “Series B Holders”) are entitled to cast the number of votes equal to the number of shares of common stock into which the shares of Series B convertible preferred stock are convertible, together with the holders of common stock as a single class, on most matters. However, the affirmative vote or consent of the Series B Holders voting separately as a class is required for certain acts taken by the Company, including the amendment or repeal of certain charter provisions, liquidation or winding up of the Company, creation of stock senior to the Series B convertible preferred stock, and/or other acts defined in the certificate of designation.
The Series B convertible preferred stock shall, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank senior to the Company’s common stock. The Company shall not declare, pay, or set aside any dividends on shares of any other class or series of capital stock of the Company unless the Series B Holders then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series B convertible preferred stock in an amount calculated pursuant to the certificate of designation.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the Series B Holders then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment shall be made to the holders of common stock by reason of their ownership thereof, an amount per share equal to $, plus any dividends declared but unpaid thereon, with any remaining assets distributed pro-rata among the holders of the shares of Series B convertible preferred stock and common stock, based on the number of shares held by each such holder, treating for this purpose all such securities as if they had been converted to common stock.
At
any time on or prior to the six-year anniversary of the issuance date of the Series B convertible preferred stock, (i) the Series B Holders
have the option to convert their shares of Series B convertible preferred stock into common stock at a conversion price of $
On the day following the six-year anniversary of the issuance of the Series B convertible preferred stock, all outstanding shares of Series B convertible preferred stock shall automatically convert into common stock as follows:
The Company shall at all times when the Series B convertible preferred stock is outstanding, reserve and keep available out of its authorized but unissued capital stock, for the purpose of effecting the conversion of the Series B convertible preferred stock, such number of its duly authorized shares of common stock as shall from time to time be sufficient to effect the conversion of all outstanding Series B convertible preferred stock.
| 25 |
Series C Convertible Preferred Stock
In March 2021, the Company entered into a securities purchase agreement with Hadron Healthcare Master Fund (“Hadron”) with respect to a financing facility of up to $ million in exchange for newly-designated Series C convertible preferred stock of the Company and warrants to purchase the Company’s common stock.
At
the closing of the transaction in March 2021, Hadron purchased $
In connection with the closing of the transaction, the Company filed a certificate of designation with respect to the rights and preferences of the Series C convertible preferred stock. Such stock is zero coupon, non-voting. and has a liquidation preference equal to its investment amount plus declared but unpaid dividends. Holders of Series C convertible preferred stock are entitled to receive dividends on an as-converted basis.
Of
the $
Provided
that as at least
The transaction imposes certain covenants on the Company with respect to the incurrence of new indebtedness, the issuance of additional shares of any designation of preferred stock, and the payment of distributions.
| 26 |
NOTE 14 – STOCKHOLDERS’ EQUITY
Stockholder Resolutions
At the Company’s 2021 annual meeting of stockholders in September 2021 (the “Annual Meeting”), stockholders approved an amendment to the Company’s certificate of incorporation increasing the number of authorized shares of common stock from to .
Also at the Annual Meeting, stockholders approved an amendment to the Company’s Amended and Restated 2018 Stock Award and Incentive Plan (the “Plan”) increasing the aggregate number shares reserved for issuance under the Plan from to .
Undesignated Preferred Stock
In February 2020, the Company filed a certificate of elimination to return all shares of formerly designated Series A convertible preferred stock to the status of authorized and unissued shares of undesignated preferred stock.
Common Stock
In February 2020, pursuant to the TIS Exchange Agreement discussed in Note 13 – Mezzanine Equity, the shares of common stock exchanged for shares of Series B convertible preferred stock were treated as an increase to treasury stock of $ ($ per share), and then immediately cancelled, thereby reducing treasury stock to zero, with corresponding reductions to common stock of approximately $ (the par value of the exchanged common shares) and additional paid-in capital of approximately $.
In
the nine months ended September 30, 2021 and 2020, the Company granted and shares of common stock, respectively, to an employee.
The fair value of these shares of approximately $ in 2021 and $ in 2020 was charged to compensation expense. Of these shares
granted, shares and shares, with fair values of approximately $
In the nine months ended September 30, 2021, the Company granted shares of restricted common stock to three employees. The fair value of these restricted shares of approximately $ was charged to compensation expense. Of these restricted shares granted, shares, with a fair value of approximately $, were yet to be issued at September 30, 2021, and were included in Common Stock Subscribed But Not Issued on the balance sheet at such date. No shares of restricted common stock were issued in 2020.
In
the nine months ended September 30, 2021 and 2020, the Company issued and shares of common stock, respectively, to settleobligations of $
In
the nine months ended September 30, 2021, the Company issued (i) shares of common stock valued at $
In July 2021, shares of common stock were returned to the Company from the adjustment of a previously converted debenture. common stock was returned in 2020.
During
the nine months ended September 30, 2021 and 2020, the Company issued and shares of common stock, respectively, associated
with previously issued subscriptions on common stock with a value of approximately $
As
previously disclosed in Note 11 – Promissory Notes, the Company issued (i) an aggregate of shares of common stock
in 2021 upon the conversion of approximately $
As
previously disclosed in Note 12 – Debentures Payable, the holder of the $21M Debentures converted (i) approximately $
As further disclosed in Note 15 – Options, the Company issued shares of common stock during the nine months ended September 30, 2021 from the exercise of stock options. options were exercised during the same period in 2020.
As further disclosed in Note 16 – Warrants, the Company issued shares of common stock during the nine months ended September 30, 2021 from the exercise of warrants. warrants were exercised during the same period in 2020.
Common Stock Issuance Obligations
At September 30, 2021, the Company was obligated to issue (i) shares of common stock valued at approximately $ in connection with a stock grant and restricted stock grants to current employees, and (ii) shares of common stock valued at approximately $ in connection with the purchase of the remaining % interest of MediTaurus as discussed in Note 3 – Acquisitions. These shares were issued in November 2021. At September 30, 2020, the Company was obligated to issue shares of common stock valued at approximately $ in connection with a stock grant to a current employee. These shares were issued in October 2020.
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During
the nine months ended September 30, 2021, the Company granted - and -year options to purchase up to shares of common
stock at exercise prices ranging from $ to $per share. The fair value of these options of approximately $
During
the nine months ended September 30, 2020, options to purchase up to shares of common stock were issued
to employees at exercise prices of $ and $ per share. The fair value of these options of approximately $
During the nine months ended September 30, 2021, options to purchase shares of common stock were exercised at prices ranging from $ to $per share. Of these exercised options, were exercised on a cashless basis with the exercise prices paid via the surrender of shares of common stock. No options were exercised during the nine months ended September 30, 2020.
During
the nine months ended September 30, 2021 and 2020, options to purchase and shares of common stock, respectively, were
forfeited or expired, resulting in an aggregate reduction of amortized compensation expense of in 2021 and approximately $
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NOTE 16 – WARRANTS
During
the nine months ended September 30, 2021, the Company issued warrants to purchase up to
During
the nine months ended September 30, 2020, in conjunction with the $21M Debentures discussed in Note 12 – Debentures Payable,
the Company issued -year warrants to purchase up to
During
the nine months ended September 30, 2021, warrants to purchase
During
the nine months ended September 30, 2021, warrants to purchase
At
September 30, 2021 and 2020, warrants to purchase up to
NOTE 17 – REVENUES
For the nine months ended September 30, 2021 and 2020, the Company’s revenues were comprised of the following major categories:
| 2021 | 2020 | |||||||
| Product sales - retail | $ | $ | ||||||
| Product sales - wholesale | ||||||||
| Real estate rentals | ||||||||
| Management fees | ||||||||
| Supply procurement | ||||||||
| Licensing fees | ||||||||
| Total revenues | $ | $ | ||||||
For
the nine months ended September 30, 2021 and 2020, revenues from two clients represented
| 29 |
NOTE 18 – BAD DEBTS
The Company maintains two types of reserves to address uncertain collections of amounts due—an allowance against trade accounts receivable (the “AR Allowance”), and a reserve against cash advanced by the Company to its cannabis-licensed clients for working capital purposes (the WC Reserve”).
During
the nine months ended September 30, 2021, the Company increased the AR Allowance by $
| 30 |
NOTE 19 – RELATED PARTY TRANSACTIONS
Effective
July 1, 2021, the Company entered into employment agreements with its CEO, CFO, and COO, expiring in June 2024, that provide for
an annual base salary of $
Pursuant to the agreements, the CEO, CFO, and COO were granted (i) on the effective date, options to purchase up to , and shares, respectively, of the Company’s common stock, at an exercise price of $ per share, that vest over year and expire in , and (ii) in October 2021, options to purchase up to , , and shares, respectively, of the Company’s common stock, at an exercise price of $ per share, that vest over year and expire in .
Additionally, the agreements (i) provide these officers with additional grants on each anniversary of the effective date of the agreements in the sole discretion of the Company’s Compensation Committee, and contain covenants not to compete, non-solicitation provisions, and termination obligations, among other terms and conditions.
In July 2021, the Company granted -year options to purchase up to shares of common stock to each of the Company’s three independent board members at an exercise price of $per share.
In
April 2020, the Company issued options to purchase up to shares of common stock to its COO, with an exercise price of $ per
share and expiring three years from grant date. The fair value of these options of approximately $
In 2020, options to purchase an aggregate of shares of common stock were exercised by the Company’s CEO, CFO, and an independent board member at exercise prices of $ and $ per share. No options were exercised by related parties in 2021.
The
Company’s corporate offices are leased from an entity in which the Company’s CFO has an investment interest. This lease expires
in October 2028 and contains a five-year extension option. In each of the nine-month periods ended September 30, 2021 and 2020, expenses
incurred under this lease approximated $
The
Company procures nutrients, lab equipment, cultivation supplies, furniture, and tools from an entity owned by the family of the Company’s
COO. The aggregate purchases from this entity in the nine months ended September 30, 2021 and 2020 approximated $
The
Company pays royalties on the revenue generated from its Betty’s Eddies® product line to an entity owned by the Company’s
COO and its SVP of Sales under a royalty agreement. This agreement was amended effective January 1, 2021 whereby, among other modifications,
the royalty percentage changed from 2.5% on all sales of Betty’s Eddies® products to (
In
the nine months ended September 30, 2021 and 2020, one of the Company’s majority owned subsidiaries paid aggregate distributions
of approximately $
In
the nine months ended September 30, 2021 and 2020, the Company purchased fixed assets and consulting services of approximately $
In
the nine months ended September 30, 2021 and 2020, the Company purchased fixed assets of approximately $
The
balance of Due To Related Parties at December 31, 2020 of approximately $
The Company’s mortgages with Bank of New England, DuQuoin State Bank, and South Porte Bank are personally guaranteed by the Company’s CEO and CFO.
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NOTE 20 – COMMITMENTS AND CONTINGENCIES
Lease Commitments
The
Company is the lessee under
The details of the Company’s operating lease agreements are as follows:
| ● | Delaware
– | |
| ● | Delaware
– a | |
| ● | Delaware
–a | |
| ● | Nevada
– | |
| ● | Massachusetts
– | |
| ● | Maryland
– a |
The
Company leases machinery and office equipment under finance leases that
The components of lease expense for the nine months ended September 30, 2021 were as follows:
| Operating lease cost | $ | |||
| Finance lease cost: | ||||
| Amortization of right-of-use assets | $ | |||
| Interest on lease liabilities | ||||
| Total finance lease cost | $ |
The
weighted average remaining lease term for operating leases is
Future minimum lease payments as of September 30, 2021 under all non-cancelable leases having an initial or remaining term of more than one year were:
Operating Leases | Finance Leases | |||||||
| 2021 | $ | $ | ||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| Total lease payments | $ | |||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| $ | $ | |||||||
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Terminated Employment Agreement
In July 2019, Mr. Kidrin, also a former director of the Company, filed a complaint in the Massachusetts Superior Court, which alleged the Company failed to pay all wages owed to him and breached the employment agreement, and requested multiple damages, attorney fees, costs, and interest. The Company moved to dismiss certain counts of the complaint and asserted counterclaims against Mr. Kidrin alleging breach of contract, breach of fiduciary duty, money had and received, and unjust enrichment.
While
the Company’s motion to dismiss was pending, the parties entered into a settlement agreement and general release in August 2021
whereby, among other conditions, (i) Mr. Kidrin’s complaint was dismissed with prejudice, (ii) the Company issued to Mr.
Kidrin five-year warrants to purchase up to
In
August 2021, the fair value of the warrants of approximately $
Maryland Acquisition
As previously disclosed in Note 3 – Acquisitions, Kind has sought to renege on the parties’ original agreement to a partnership/joint venture made in the fall of 2016 and subsequent MOU. The Company engaged with the members of Kind in good faith in an attempt to reach updated terms acceptable to both parties, however the members of Kind failed to reciprocate in good faith, resulting in an impasse. Incrementally, both parties through counsel further sought to resolve the impasse, however such initiative resulted in both parties commencing legal proceedings.
In
November 2019, Kind commenced an action by filing a complaint against the Company in the Circuit Court for Washington County, MD captioned
Kind Therapeutics USA, Inc. vs. MariMed, Inc., et al. (Case No. C-21-CV-19-000670) (the “Complaint”). The Complaint, as amended,
alleges breach of contract, breach of fiduciary duty, unjust enrichment, intentional misrepresentation, rescission, civil conspiracy,
and seeking an accounting and declaratory judgment and damages in excess of $
At the time the Complaint and Counterclaims were filed, both parties, MariMed (including MariMed Holdings MD LLC and MariMed Advisors Inc.) and Kind, brought motions for a temporary restraining order and a preliminary injunction. By Opinion and Order entered on November 21, 2019, the Court denied both parties motions for a temporary restraining order. In its opinion, the Court specifically noted that, contrary to Kind’s allegations, the MSA and the Lease “appear to be independent, valid and enforceable contracts.”
A
hearing on the parties’ cross-motions for preliminary injunction was held in September 2020 and November 2020. Also in November
2020, the Court granted the Company’s motion for summary judgment as to the Lease, determining that the Lease is valid and enforceable.
Based on this ruling, the Company is seeking judgment at trial in the amount of approximately $
In December 2020, the Court entered a Preliminary Injunction Order, accompanied by a Memorandum Opinion, denying Kind’s motion for a preliminary injunction (which Kind had withdrawn at the conclusion of the hearing) and granting the Company’s request for preliminary injunction. The Court determined that the Company is likely to succeed with respect to the validity and enforceability of the MSA and the LMA, that the Company would suffer substantial and irreparable harm without the preliminary injunction, and that the balance of convenience and public interest both warranted the issuance of a preliminary injunction in the Company’s favor. The Court ordered, inter alia, that the MSA and LMA are in effect pending judgment after trial on the merits, and that Kind and its members, and their attorneys, agents, employees, and representatives, are prohibited from (a) interfering with the Company’s duties and responsibilities under the MSA and (b) withdrawing funds, making any distribution, paying any loans, returning any capital, or making any payment towards a debt from any Kind bank or other financial account(s) without written consent of the Company or Order of the Court, thereby preserving the Company’s management of Kind’s operations and finances at least through the jury trial currently scheduled to begin on March 28, 2022. Further, the Court ordered Kind to pay management and licensing fees to the Company beginning January 1, 2021. Kind has noted an appeal of the Order to the Maryland Court of Special Appeals, which is pending; however, the preliminary injunction order remains in effect.
In addition to the favorable rulings on the Lease, MSA, and LMA, the Company believes that its claims with respect to the 70%/30% partnership/joint venture agreement are meritorious. Further, the Company believes that Kind’s claims against the Company are without merit. On March 18, 2021, the Court issued an opinion and order on Kind’s motion for summary judgment finding that the MOU was not enforceable by the Company against Kind as a final binding agreement. The Company is evaluating an appeal of this ruling which under Maryland rules can only be pursued upon final judgment.
In March 2021, the Kind parties filed motions to modify the preliminary injunction order or, alternatively, for direction from the Court based on Kind’s claim to have terminated the MSA. In September 2021, the court denied the motion to modify the preliminary injunction and granted, in part, the motion for direction, but only with respect to Kind’s request to pay litigation costs. The preliminary injunction remains in full effect, and the Company has filed a petition for civil contempt against the Kind parties for interfering with the Company’s management of Kind. The contempt petition is currently pending.
The Company intends to aggressively prosecute and defend the action. Trial has been scheduled from March 28, 2022 to April 11, 2022.
DiPietro Lawsuit
In August 2020, Jennifer DiPietro, directly and derivatively on behalf of Mari Holdings MD LLC (“Mari-MD”) and Mia Development LLC (“Mia”), commenced a suit against the Company’s CEO, CFO, and wholly-owned subsidiary MariMed Advisors Inc. (“MMA”), in Suffolk Superior Court, Massachusetts.
| 33 |
In this action, DiPietro, a party to prior ongoing litigation in Maryland involving the Company and Kind as discussed above, brings claims for breach of fiduciary duty, breach of contract, fraud in the inducement, aiding and abetting the alleged breach of fiduciary duty, and also seeks access to books and records and an accounting related to her investments in Mari-MD and Mia. DiPietro seeks unspecified money damages and rescission of her interest in Mari-MD, but not of her investment in Mia, which has provided substantial returns to her as a member.
The Company has answered the complaint and MMA filed counterclaims against DiPietro on its own behalf and derivatively on behalf of Mari-MD for breach of her fiduciary duties to each of those entities, and for tortious interference with Mari-MD’s lease and MMA’s management services agreement with Kind.
The Company believes that the allegations of the complaint are without merit and intends to defend the case vigorously. The Company’s counterclaim seeks monetary damages from DiPietro, including the Company’s legal fees in the Kind action.
Bankruptcy Claim
During
2019, the Company’s MMH subsidiary sold and delivered hemp seed inventory to GenCanna Global Inc., a Kentucky-based cultivator,
producer, and distributor of hemp (“GenCanna”). At the time of sale, the Company owned a
In February 2020, GenCanna USA, GenCanna’s wholly-owned operating subsidiary, under pressure from certain of its creditors including MGG Investment Group LP, GenCanna’s senior lender (“MGG”), agreed to convert a previously-filed involuntary bankruptcy proceeding with the U.S. Bankruptcy Court in the Eastern District of Kentucky (the “Bankruptcy Court”) into a voluntary Chapter 11 proceeding. In addition, GenCanna and GenCanna USA’s subsidiary, Hemp Kentucky LLC (collectively with GenCanna and GenCanna USA, the “GenCanna Debtors”), filed voluntary petitions under Chapter 11 in the Bankruptcy Court.
In
May 2020, after an abbreviated solicitation/bid/sale process, the Bankruptcy Court, over numerous objections by creditors and shareholders
of the GenCanna Debtors which included the Company, entered an order authorizing the sale of all or substantially all of the assets of
the GenCanna Debtors to MGG. After the consummation of the sale of all or substantially all of their assets and business, the GenCanna
Debtors n/k/a OGGUSA, Inc. and OGG, Inc. (the “OGGUSA Debtors”) filed their liquidating plan of reorganization (the “Liquidating
Plan”) to collect various prepetition payments and commercial claims against third parties, liquidate the remaining assets of the
ODDUSA Debtors, and make payments to creditors. The Company and the unsecured creditors committee filed objections to such Liquidating
Plan, including opposition to the release of litigation against the OGGUSA Debtors’ senior lender, MGG, for lender liability, equitable
subordination, and return of preference. As a part of such plan confirmation process, the OGGUSA Debtors filed various objections to
proofs of claims filed by various creditors, including the proof of claim in the amount of approximately $
Since the approval of the Liquidating Plan, the OGGUSA Debtors have been in the process of liquidating the remaining assets, negotiating and prosecuting objections to other creditors’ claims, and pursuing the collection of accounts receivable and Chapter 5 bankruptcy avoidance claims. As of the date of this filing, there is insufficient information as to what portion, if any, of the Company’s allowed claim will be paid upon the completion of the liquidation of the remaining assets of the OGGUSA Debtors.
Contract Dispute
In September 2021, MD Global Partners LLC (“MDGP”) filed an action in the Supreme Court of the State of New York alleging breach of contract. This matter was settled in October 2021 as disclosed in Note 21 – Subsequent Events.
| 34 |
NOTE 21 – SUBSEQUENT EVENTS
Legal Settlement
In October 2021, the Company entered into a settlement
agreement with and obtained a general release from MDGP whereby the Company paid $
Promissory Note Conversions
In
October and November 2021, the Noteholder of the $3.2M Note converted $
Equity Transactions
In October 2021, the Company granted its CEO, CFO, and COO options to purchase up to , , and shares, respectively, of the Company’s common stock, at an exercise price of $ per share, that vest over one year and expire in September 2026.
Also
during this period, (i) options to purchase shares of common stock were exercised at an
exercise price of $per share, (ii) options to purchase shares of common stock were forfeited, (iii)
warrants to purchase
| 35 |
Item 2. Management’s Discussions and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
When used in this form 10-Q and in future filings by the Company with the Commission, the words or phrases such as “anticipate,” “believe,” “could,” “should,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. These factors include, but are not limited to, changes that may occur to general economic and business conditions; changes in current pricing levels that we can charge for our services or which we pay to our suppliers and business partners; changes in political, social and economic conditions in the jurisdictions in which we operate; changes to laws and regulations that pertain to our products and operations; and increased competition.
The following discussion should be read in conjunction with the unaudited financial statements and related notes which are included under Item 1 of this report.
We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.
Overview
General
MariMed Inc. (the “Company”) is a multi-state operator in the United States cannabis industry. The Company develops, operates, manages, and optimizes over 300,000 square feet of state-of-the-art, regulatory-compliant facilities for the cultivation, production and dispensing of medicinal and recreational cannabis. The Company also licenses its proprietary brands of cannabis and hemp-infused products, along with other top brands, in several domestic markets and overseas.
Upon its entry into the cannabis industry in 2014, the Company was an advisory firm that procured state-issued cannabis licenses on behalf of its clients, developed cannabis facilities which it leased to these newly-licensed companies, and provided industry-leading expertise and oversight in all aspects of their cannabis operations. The Company also provided its clients with ongoing regulatory, accounting, real estate, human resources, and administrative services.
More recently, the Company made the strategic decision to transition from a consulting business to a direct owner and operator of cannabis licenses in high-growth states. Core to this transition is the acquisition and consolidation of the Company’s clients (the “Consolidation Plan”). Among several benefits, the Consolidation Plan would present a simpler, more transparent financial picture of the full breadth of the Company’s efforts, with a clearer representation of the revenues, earnings, and other financial metrics the Company has generated for its clients. The Company has played a key role in the successes of these entities, from the securing of their cannabis licenses, to the development of facilities that are models of excellence, to funding their operations, and to providing operational and corporate guidance. Accordingly, the Company believes it is well suited to own these facilities and manage the continuing growth of their operations.
To date, acquisitions of its client businesses in Massachusetts and Illinois have been completed and establish the Company as a fully integrated seed-to-sale multi-state operator (“MSO”). The acquisitions of the remaining entities located in Maryland, Nevada, and Delaware are at various stages of completion and subject to each state’s laws governing the ownership transfer of cannabis licenses, which in the case of Delaware requires a modification of current cannabis ownership laws to permit for-profit ownership. Meanwhile, the Company continues to expand these businesses and maximize the Company’s revenue from rental income, management fees, and licensing royalties.
The transition to a fully integrated MSO is part of a strategic growth plan (the “Strategic Growth Plan”) the Company is implementing to drive its revenues and profitability. The Strategic Growth Plan has four components: (i) complete the Consolidation Plan, (ii) increase revenues in existing states, by spending capital to increase the Company’s cultivation and production capacity, and develop additional assets within those states, (iii) expand the Company’s footprint in additional legal cannabis states through new applications and acquisitions of existing cannabis businesses, and (iv) optimize the Company’s brand portfolio and licensing revenue, by creating products that meet specific customer needs, and distributing these products in states where cannabis has been legalized.
As to its products, the Company has created its own brands of cannabis flower, concentrates, and precision-dosed products utilizing proprietary strains and formulations. These products are developed by the Company in cooperation with state-licensed operators who meet the Company’s strict standards, including all natural—not artificial or synthetic—ingredients. The Company licenses its brands and product formulations only to certified manufacturing professionals who follow state cannabis laws and adhere to the Company’s precise scientific formulations and trademarked product recipes.
The Company utilizes proprietary cannabis genetics to produce high-quality flowers and concentrates under the award-winning3 Nature’s Heritage™ brand, and cannabis-infused products under the brand names Kalm Fusion®, in the form of chewable tablets and drink powder mixes, and the award-winning1 Betty’s Eddies® brand of all natural fruit chews. Both cannabis-infused brands are top-selling products in Maryland and Massachusetts2 and the Company intends to continue to introduce additional product lines under these brands in the foreseeable future.
The Company also has exclusive alliances with prominent brands. The Company has partnered with renown ice cream maker Emack & Bolio’s® to create a line-up of cannabis-infused vegan and dairy ice cream. Additionally, the Company has secured distribution rights for the Binske® line of cannabis products crafted from premium artisan ingredients, the Healer™ line of medical full-spectrum cannabis tinctures, and the clinically-tested medicinal cannabis strains developed in Israel by global medical cannabis research pioneer Tikun Olam™.
| 1 | LeafLink 2021 Best Selling Medical Product, LeafLink 2020 Industry Innovator, Explore Maryland Cannabis 2020 Edible of the Year, LeafLink 2019 Best Selling Medical Product. |
| 2 | Sources: BDSA 2021 and LeafLink Insights 2020. |
| 3 | LeafLink 2021 Fastest-Selling Concentrate. |
| 36 |
Revenues
The Company’s revenues are primarily comprised of the following categories:
| ● | Product Sales – direct sales of cannabis and cannabis-infused products by the Company’s retail dispensaries and wholesale operations in Massachusetts and Illinois, and sales of hemp and hemp-infused products. An increase in product sales is expected from the Company’s planned cannabis-licensee acquisitions in Maryland, Nevada, and Delaware (upon this state’s amendment to permit for-profit ownership of cannabis entities). | |
| ● | Real Estate – rental income and additional rental fees generated from leasing of the Company’s state-of-the-art, regulatory-compliant cannabis facilities to its cannabis-licensed clients. | |
| ● | Management – fees for providing the Company’s cannabis clients with comprehensive oversight of their cannabis cultivation, production, and dispensary operations. Along with this oversight, the Company provides human resources, regulatory, marketing, and other corporate services. | |
| ● | 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. | |
| ● | Licensing – royalties from the licensed distribution of the Company’s branded products including Kalm Fusion® and Betty’s Eddies®, and from sublicensing of contracted brands including Healer and Tikun Olam, to regulated dispensaries throughout the United States and Puerto Rico. |
Expenses
The Company classifies its expenses into three general categories:
| ● | Cost of Revenues – the direct costs associated with the generation of the Company’s revenues. | |
| ● | Operating Expenses – comprised of the sub-categories of personnel, marketing and promotion, general and administrative, and bad debts. | |
| ● | Non-operating Income and Expenses – comprised of the sub-categories of interest expense, interest income, losses on obligations settled with equity, changes in the fair value of non-consolidated investments, and other non-operating gains and losses. |
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Liquidity and Capital Resources
The Company produced significant improvements to its liquidity in the reported periods:
| ● | Cash and cash equivalents increased 753% to approximately $25.6 million at September 30, 2021, from approximately $3.0 million at December 31, 2020. | |
| ● | Working capital increased to approximately $27.3 million at September 30, 2021 from a working capital deficit of approximately $2.2 million at December 31, 2020, a positive swing of approximately $29.5 million. | |
| ● | In the nine months ended September 30, 2021, the Company’s operating activities provided positive cash flow of approximately $28.2 million, compared to approximately $1.6 million in the same period in 2020, an increase of approximately $26.6 million. |
The aforementioned improvements were primarily the result of (i) increases in revenues and profitability generated by the Company’s cannabis operations in the states of Illinois and Massachusetts, acquired as part of the Company’s Consolidation Plan to transition from a consulting business to a direct owner of cannabis licenses and operator of seed-to-sale operations, and (ii) $23.0 million of gross proceeds raised by the Company under a financing facility of up to $46.0 million pursuant to a securities purchase agreement with Hadron Healthcare Master Fund (“Hadron”) in exchange for newly-designated Series C convertible preferred stock and warrants.
Additionally, the section below entitled Non-GAAP Measurement discusses an additional financial measure not defined by GAAP which the Company’s management uses to evaluate liquidity.
Operating Activities
Net cash provided by operating activities in the nine months ended September 30, 2021 approximated $28.2 million, compared to approximately $1.6 million in the same period in 2020. The year-over-year improvement was primarily attributable to the increase in cannabis-derived profits generated by the acquired operations in Illinois and Massachusetts.
Investing Activities
Net cash used in investing activities in the nine months ended September 30, 2021 approximated $13.7 million, compared to approximately $3.9 million in the same period in 2020. The increase was due to (i) development of the Company’s facilities in Milford, DE, Mt. Vernon, IL, Metropolis, IL, (ii) improvements to existing facilities in Massachusetts, Maryland, Illinois, and Delaware, and (iii) amounts paid to renew cannabis licenses, offset by proceeds from (x) notes receivable and (y) the MRSVP asset sale transaction.
Financing Activities
Net cash provided by financing activities in the nine months ended September 30, 2021 approximated $7.7 million, compared to approximately $3.8 million in the same period in 2020. The 2021 activities primarily consisted of the net proceeds of approximately $22.6 million from the aforementioned Hadron transaction and an additional mortgage from DuQuoin State Bank of $2.7 million, offset by the paydown of debt and obligations of approximately $17.4 million and distributions of approximately $301,000. The 2020 activities primarily consisted of debt financings of approximately $20.1 million, offset by paydowns of debt and obligations of approximately $16.0 million and distributions of approximately $229,000.
The remaining proceeds from the Hadron transaction will fund construction and upgrades of certain of the Company’s owned and managed facilities. The balance of the committed facility of up to an additional $23.0 million is intended to fund the Company’s specific targeted acquisitions that are contracted in 2021 and consummated by the end of 2022.
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Results of Operations
Three months ended September 30, 2021 compared to three months ended September 30, 2020
Revenues in the three months ended September 30, 2021 approximated $33.2 million compared to approximately $13.5 million in the same period in 2020, an increase of approximately $19.7 million or 146.7%. The year-over-year increase was primarily due to the nearly three-fold growth of cannabis sales to approximately $30.1 million in the current period, compared to approximately $10.8 million from the same period a year ago. This growth was attributable to sales increases of approximately (i) $11.7 million generated by the Company’s retail operations in Illinois, where the Company opened an additional dispensary in late 2020 and another in May 2021, and (ii) $4.1 million generated by the Company’s retail operations in Massachusetts, which saw a nearly ten-fold increase in customer visits year-over-year, and (iii) $3.5 million generated by the Company’s wholesale operations in Massachusetts, which saw a three-fold increase in customers. The year-over-year increase in revenues was also the result of continued improvement in real estate rentals, management fees, and supply procurement revenue primarily from increased business with the Company’s clients in Delaware and Maryland.
Cost of revenues in the three months ended September 30, 2021 approximated $15.0 million compared to approximately $4.8 million in the same period in 2020, an increase of approximately $10.2 million. The year-over-year variance was primarily attributable to the higher level of revenues as these costs are largely variable in nature and fluctuate in step with revenues. As a percentage of revenues, these costs increased to 45.3% in the three months ended September 30, 2021 from 35.5% in the same period in 2020, primarily due to the change in the relative mix of revenue categories in each period. Specifically, in the three months ended September 30, 2021, (a) 90.6% of revenues were comprised of product sales, which historically have had corresponding cost of revenue of approximately 45.0% to 50.0%, and (b) 7.3% of revenues were comprised of real estate rentals and management fees, which have no corresponding cost of revenue. This compares to revenues in the same period in 2020 that were comprised of (x) 80.0% of product sales and (y) 14.2% of real estate rentals and management fees. While the cost rate is higher for product sales, the level of product sales the Company can potentially generate is several multiples higher than the level of real estate rentals and management fees the Company can generate, resulting in significantly higher potential gross profit dollars to be generated.
As a result of the foregoing, gross profit approximated $18.2 million, or 54.7% of revenues, in the three months ended September 30, 2021, from approximately $8.7 million, or 64.5% of revenues, in the same period in 2020.
Personnel expenses increased to approximately $1.5 million in the three months ended September 30, 2021 from approximately $1.4 million in the same period in 2020. The increase was primarily due to the hiring of additional staff to support (i) higher levels of revenue, and (ii) the Company’s expansion into a direct owner and operator of seed-to-sale cannabis businesses, offset by the reversal of an approximate $1.0 million accrual related to the Kidrin complaint which was settled in August 2021. As a percentage of revenues, personnel expenses decreased to 4.5% (7.6% excluding the accrual reversal) in the three months ended September 30, 2021 from 10.1% in the same period in 2020.
Marketing and promotion costs increased to approximately $563,000 in the three months ended September 30, 2021 from approximately $103,000 in the same period in 2020. The increase is primarily the result of increased spending on branding and design consulting, customer loyalty programs, social media, and local outdoor advertising. As a percentage of revenues, these costs increased to 1.7% in the three months ended September 30, 2021 compared with 0.8% in the same period in 2020.
General and administrative costs increased to approximately $9.5 million in the three months ended September 30, 2021 from approximately $2.9 million in the same period in 2020. This change is primarily due to increases of approximately (i) $6.2 million of non-cash equity compensation expense associated with option grants and warrant issuances, (ii) $407,000 of facility costs from additional properties in service in 2021, and (iii) $269,000 of credit card processing fees due to increased credit card sales at the Company’s cannabis dispensaries, offset by lower professional fees. As a percentage of revenues, these costs increased to 28.6% in the three months ended September 30, 2021 from 21.8% in the same period in 2020.
Bad debt expense approximated $36,000 in the three months ended September 30, 2021 compared to approximately $892,000 in the same period in 2020. The decrease is due to lower reserves required against trade accounts receivable. As a percentage of revenues, this expense decreased to 0.1% in the three months ended September 30, 2021 from 6.6% in the same period in 2020.
As a result of the foregoing, the Company generated operating income of approximately $6.6 million in the three months ended September 30, 2021 compared to approximately $3.4 million in the same period in 2020.
Net non-operating expenses decreased to approximately $487,000 in the three months ended September 30, 2021 from approximately $1.7 million in the same period in 2020. The decrease is primarily due to an approximate $1.6 million reduction of interest expense from lower levels of outstanding debt, offset by the gain on sale of the MRSVP investment of approximately $309,000.
As a result of the foregoing, the Company generated income before income taxes of approximately $6.1 million in the three months ended September 30, 2021, compared to approximately $1.7 million in the same period in 2020. After a tax provision of approximately $4.0 million in the three months ended September 30, 2021, net income approximated $2.1 million in the current period, compared to approximately $1.7 million in the prior period.
| 39 |
Nine months ended September 30, 2021 compared to nine months September 30, 2020
Revenues for the nine months ended September 30, 2021 approximated $90.4 million compared to approximately $30.5 million for the same period in 2020, an increase of approximately $59.9 million or 196.1%. The year-over-year increase was primarily attributable to the nearly four-fold growth of cannabis sales to approximately $79.8 million in the current period, compared to approximately $22.0 million from the same period a year ago. This growth was attributable to sales increases of approximately (i) $29.6 million generated by the Company’s retail operations in Illinois, where the Company opened an additional dispensary in late 2020 and another in May 2021, and also saw significant increases in sales of existing dispensaries in this state, (ii) $11.9 million generated by the Company’s retail operations in Massachusetts, which saw a 1,298.6% increase in customer visits, and (iii) $16.3 million generated by the Company’s wholesale operations in Massachusetts, which saw a year-over-year increase in customers of 245.5%. The year-over-year increase in revenues was also the result of continued improvement across all revenue categories, primarily from increased business with the Company’s clients in Delaware and Maryland.
Cost of revenues approximated $39.6 million for the nine months ended September 30, 2021 from approximately $10.8 million for the same period in 2020. The year-over-year variance was primarily attributable to the higher level of revenues as these costs are largely variable in nature and fluctuate in step with revenues. As a percentage of revenues, these costs increased to 43.8% in the nine months ended September 30, 2021 from 35.5% in the same period in 2020, primarily due to the change in the relative mix of revenue categories in each period. Specifically, in the nine months ended September 30, 2021, (a) 88.2% of revenues were comprised of product sales, which historically have had corresponding costs of revenue of approximately 45.0% to 50.0%, and (b) 8.8% of revenues were comprised of real estate rentals and management fees, which have no corresponding cost of revenue. This compares to revenues in the same period in 2020 that were comprised of (x) 72.0% of product sales and (y) 20.1% of real estate rentals and management fees. While the cost rate is higher for product sales, the level of product sales the Company can potentially generate is several multiples higher than the level of real estate rentals and management fees the Company can generate, resulting in significantly higher potential gross profit dollars to be generated.
As a result of the foregoing, gross profit approximated $50.8 million, or 56.2% of total revenues, for the nine months ended September 30, 2021 from approximately $19.7 million, or 64.5% of total revenues, for the same period a year ago.
Personnel expenses increased to approximately $5.3 million for the nine months ended September 30, 2021 from approximately $4.1 million for the same period a year ago. The increase was primarily due to the hiring of additional staff to support (i) higher levels of revenue, and (ii) the Company’s expansion into a direct owner and operator of seed-to-sale cannabis businesses, offset by the reversal of an approximate $1.0 million accrual related to the Kidrin complaint which was settled in August 2021. As a percentage of revenues, personnel expenses decreased to 5.8% (7.0% excluding the accrual reversal) in 2021 compared to 13.3% in 2020.
Marketing and promotion costs increased to approximately $1.1 million for the nine months ended September 30, 2021 from approximately $281,000 for the same period a year ago. The change is primarily the result of increased spending on branding and design consulting, customer loyalty programs, social media, and local outdoor advertising. As a percentage of revenues, these costs increased to 1.2% in 2021 from 0.9% in 2020.
General and administrative costs increased to approximately $16.9 million for the nine months ended September 30, 2021 from approximately $7.5 million for the same period a year ago. This change is primarily due to increases of approximately (i) $7.2 million in non-cash equity compensation expense associated with option grants and warrant issuances, (ii) $1.0 million in facility costs on additional properties in service in 2021, (iii) $896,000 of credit card processing fees due to a significant increase in credit card sales at the Company’s cannabis dispensaries, and (iv) $351,000 in depreciation and amortization expenses from higher property, equipment, and intangibles. As a percentage of revenues, general and administrative costs were 18.7% in 2021 compared with 24.6% in 2020, reflecting the more efficient utilization of the Company’s fixed overhead costs.
Bad debt expense increased to approximately $1.9 million in the nine months ended September 30, 2021 compared to approximately $1.3 million in the same period in 2020. The change is due to the increase of reserves recorded against aging trade accounts receivable. As a percentage of revenues, this expense decreased to 2.1% in the nine months ended September 30, 2021 from 4.4% in the same period in 2020.
As a result of the foregoing, the Company generated operating income of approximately $25.7 million for the nine months ended September 30, 2021, compared to approximately $6.5 million for the same period in 2020.
Net non-operating expenses decreased to approximately $2.6 million for the nine months ended September 30, 2021 compared to approximately $8.3 million for the same period in 2020. The year-over-year change is primarily due to an approximate $5.5 million reduction of interest expense from lower levels of outstanding debt, coupled with an approximate $506,000 decrease in the fair value of investments, offset by the gain on sale of the MRSVP investment of approximately $309,000.
As a result of the foregoing, the Company generated income before income taxes of approximately $23.0 million for the nine months ended September 30, 2021. For the same period a year ago, the Company incurred a loss before income taxes of approximately $1.8 million. After a tax provision of approximately $9.0 million in 2021, the Company generated net income of approximately $14.0 million for the nine months ended September 30, 2021 compared to a net loss of approximately $1.8 million for the same period in 2020, a positive swing of approximately $15.8 million.
| 40 |
Non-GAAP Measurement
In addition to the financial information reflected in this report, which is prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), the Company is providing a non-GAAP financial measurement of profitability – Adjusted EBITDA – as a supplement to the preceding discussion of the Company’s financial results.
Management defines Adjusted EBITDA as net income (loss), determined in accordance with GAAP, excluding the following:
| - | interest income and interest expense; | |
| - | income taxes; | |
| - | depreciation of fixed assets and amortization of intangibles; | |
| - | non-cash expenses on debt and equity issuances; | |
| - | impairment or write-downs of intangible assets; | |
| - | unrealized gains and losses on investments and currency translations; | |
| - | legal settlements; | |
| - | gains or losses from the extinguishment of debt via the issuance of equity; | |
| - | discontinued operations; and | |
| - | merger- and acquisition-related transaction expenses. |
Management believes Adjusted EBITDA is a useful measure to assess the performance and liquidity of the Company as it provides meaningful operating results by excluding the effects of expenses that are not reflective of its operating business performance. In addition, the Company’s management uses Adjusted EBITDA to understand and compare operating results across accounting periods, and for financial and operational decision making. 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.
Management believes that investors and analysts benefit from considering Adjusted EBITDA in assessing the Company’s financial results and its ongoing business as it allows for meaningful comparisons and analysis of trends in the business. Adjusted EBITDA is used by many investors and analysts themselves, along with other metrics, to compare financial results across accounting periods and to those of peer companies.
As there are no standardized methods of calculating non-GAAP measurements, the Company’s calculations may differ from those used by analysts, investors, and other companies, even those within the cannabis industry, and therefore may not be directly comparable to similarly titled measures used by others.
Reconciliation of Net Income (Loss) to Adjusted EBITDA (a Non-GAAP Measurement)
The table below reconciles Net Income (Loss) to Adjusted EBITDA for the three and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | ||||||||||||||||
| Net income (loss) | $ | 2,123,148 | $ | 1,695,826 | $ | 14,021,750 | $ | (1,783,122 | ) | |||||||
| Interest expense, net | 274,230 | 1,886,494 | 1,981,053 | 7,459,936 | ||||||||||||
| Income taxes | 4,009,111 | - | 9,026,016 | - | ||||||||||||
| Depreciation and amortization | 708,893 | 574,317 | 2,017,500 | 1,648,510 | ||||||||||||
| EBITDA | 7,115,382 | 4,156,637 | 27,046,319 | 7,325,324 | ||||||||||||
| Amortization of stock grants | 228,003 | 5,364 | 233,368 | 16,094 | ||||||||||||
| Amortization of option grants | 5,324,301 | 150,624 | 6,208,376 | 707,003 | ||||||||||||
| Amortization of stand-alone warrant issuances | - | 2,179 | 55,786 | 2,179 | ||||||||||||
| Amortization of warrants issued with stock | - | - | 654,681 | - | ||||||||||||
| Loss on equity issued to settle obligations | - | - | 2,545 | 44,678 | ||||||||||||
| Equity in earnings of investments | - | (51,511 | ) | - | (18,553 | ) | ||||||||||
| Asset write-down | - | 84,708 | - | 84,708 | ||||||||||||
| Legal settlement | (266,717 | ) | - | (266,717 | ) | - | ||||||||||
| Change in fair value of investments | 522,106 | (217,374 | ) | 937,390 | 704,172 | |||||||||||
| Adjusted EBITDA | $ | 12,923,075 | $ | 4,130,627 | $ | 34,871,748 | $ | 8,865,605 | ||||||||
| 41 |
2021 and 2022 Plans
For the balance of 2021 and into 2022, the Company’s focus will be to continue to execute its Strategic Growth Plan. The Company’s priority activities will include the following:
| 1) | Continue to consolidate the cannabis businesses that the Company has developed and manages. | |
| 2) | Expand our revenue, assets, and footprint in the states in which the Company is operating. | |
| - In Massachusetts, the Company intends to open two additional dispensaries and significantly expand the capacity and capability of its manufacturing facility. | ||
| - In Delaware, the Company is completing the development of an additional 60,000 square feet of cultivation and production in a new facility in Milford. | ||
| - In Maryland, the Company intends to expand its manufacturing facility by 40,000 square feet and open a dispensary in Annapolis. | ||
| -In Illinois, the Company intends to go vertical by acquiring one or more craft licenses and to potentially add up to six more dispensaries up to the statutory limit of ten. | ||
| 3) | Expand into other legal states through M&A and filing new applications in states where new licensing opportunities arise. | |
| 4) | Expand revenues by producing and distributing our award-winning brands to qualified strategic partners or acquiring production and distribution licenses. |
No assurances can be given that any of these plans will come to fruition or that if implemented will necessarily yield positive results.
Subsequent Events
Please refer to Note 21 – Subsequent Events of the Company’s financial statements included in this report for a discussion of material events that occurred after the balance sheet date.
The issuance of the shares of common stock described in Note 21 – Subsequent Events of the Company’s financial statements were deemed to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon Sections 4(a)(2) and/or 4(a)(5) of the Securities Act. A legend restricting the sale, transfer, or other disposition of these securities other than in compliance with the Securities Act was placed on the securities issued in the foregoing transactions.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Inflation
In the opinion of management, inflation has not had a material effect on the Company’s financial condition or results of its operations.
Seasonality
In the opinion of management, the Company’s financial condition and results of its operations are not materially impacted by seasonal sales.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is a “smaller reporting company” as defined by Regulation S-K and, as such, is not required to provide the information contained in this item pursuant to Regulation S-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2021 (the “Evaluation Date”). Based upon that evaluation, the chief executive officer and the chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) are accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the past several fiscal years, we implemented significant measures to remediate the previously disclosed ineffectiveness of our internal control over financial reporting, which included an insufficient degree of segregation of duties amongst our accounting and financial reporting personnel, and the lack of a formalized and complete set of policy and procedure documentation evidencing our system of internal controls over financial reporting. The remediation measures consisted of the engagement of accounting consultants as needed to provide expertise on specific areas of the accounting guidance, the continued hiring of individuals with appropriate experience in internal controls over financial reporting, and the modification of our accounting processes and enhancement to our financial controls, including the testing of such controls.
Other than as described above, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) that occurred during the three months ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 43 |
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
In July 2019, Mr. Kidrin, also a former director of the Company, filed a complaint in the Massachusetts Superior Court, which alleged the Company failed to pay all wages owed to him and breached his employment agreement. The Company moved to dismiss certain counts of the complaint and asserted counterclaims against Mr. Kidrin.
In August 2021, the parties entered into a settlement agreement and general release whereby, among other conditions, (i) Mr. Kidrin’s complaint was dismissed with prejudice, (ii) the Company issued to Mr. Kidrin five-year warrants to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $0.50 per share, (iii) the Company irrevocably transferred intangible assets relating to the online virtual worlds business the Company had conducted in early 2014, prior to its pivot into the legal cannabis industry (such assets had zero carrying value on the Company’s balance sheet), and (iv) each party released and discharged the other from all claims, losses, and liabilities.
In September 2021, MD Global Partners LLC (“MDGP”) filed an action in the Supreme Court of the State of New York alleging that the Company had breached an executed contract. In October 2021, the Company entered into a settlement agreement with and obtained a general release from MDGP whereby the Company paid $150,000 to resolve this matter.
Other than the above, there has been no material change to the status of the Company’s legal proceedings.
Item 1A. Risk Factors
As a smaller reporting company, the Company is not required to provide the information contained in this item pursuant to Regulation S-K. However, information regarding the Company’s risk factors appears in Part I, Item 1A. of its Annual Report on Form 10-K for the year ended December 31, 2020. These risk factors describe some of the assumptions, risks, uncertainties, and other factors that could adversely affect the Company’s business or that could otherwise result in changes that differ materially from management’s expectations. There have been no material changes to the risk factors contained in the Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2021, the Company issued (i) 3,104,725 shares of common stock upon the conversion of approximately $1,087,000 of principal of promissory notes, (iii) 145,217 shares of common stock, with a fair value on grant date of approximately $133,000 in the aggregate, in connection with the grants of restricted stock to employees, (iv) 750,000 shares of common stock valued at $705,000 to purchase property and equipment, and (v) 409,308 shares of common stock to pay fees of approximately $375,000.
The issuance of the shares of common stock described above were deemed to be exempt from registration under the Securities Act in reliance upon Sections 4(a)(2) and/or 4(a)(5) of the Securities Act. A legend restricting the sale, transfer, or other disposition of these securities other than in compliance with the Securities Act was placed on the securities issued in the foregoing transactions.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
| 44 |
Item 6. Exhibits
| 45 |
| 46 |
| 101.INS XBRL | Instance Document * | |
| 101.SCH XBRL | Taxonomy Extension Schema * | |
| 101.CAL XBRL | Taxonomy Extension Calculation Linkbase * | |
| 101.DEF XBRL | Taxonomy Extension Definition Linkbase * | |
| 101.LAB XBRL | Taxonomy Extension Label Linkbase * | |
| 101.PRE XBRL | Taxonomy Extension Presentation Linkbase * | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * |
* Filed herewith.
** Furnished herewith in accordance with Item 601 (32)(ii) of Regulation S-K.
*** This exhibit is a management contract or compensatory plan or arrangement.
| 47 |
| (a) | Incorporated by reference to the same numbered exhibit of the Registration Statement on Form 10-12G (File No. 000-54433) filed on June 9, 2011. |
| (b) | Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2016, filed on April 17, 2017. |
| (c) | Incorporated by reference to the Current Report on Form 8-K filed on November 9, 2018. |
| (d) | Incorporated herein by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A filed on August 26, 2019. |
| (e) | Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q for the period ended September 30, 2019, filed on November 29, 2019. |
| (f) | Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed on February 12, 2020. |
| (g) | Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on February 12, 2020. |
| (h) | Incorporated by reference to the Current Report on Form 8-K filed on February 27, 2020. |
| (i) | Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended June 30, 2020, filed on May 28, 2020. |
| (j) | Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed on June 30, 2020. |
| (k) | Incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed on June 30, 2020. |
| (l) | Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on June 30, 2020. |
| (m) | Incorporated by reference to the same numbered exhibit of the Current Report on Form 8-K filed on October 26, 2020. |
| (n) | Incorporated by reference to Exhibit 10.13 of the Current Report on Form 8-K filed on October 26, 2020. |
| (o) | Incorporated by reference to the same numbered exhibit of the Annual Report on Form 10-K for the year ended December 31, 2012, filed on March 29, 2013. |
| (p) | Incorporated by reference to the same numbered exhibit of the Current Report on Form 8-K filed on March 2, 2021. |
| (q) | Incorporated by reference to the same numbered exhibit of the Annual Report on Form 10-K for the year ended December 31, 2020, filed on March 23, 2021. |
| (r) | Incorporated by reference to the exhibit of the Current Report on Form 8-K filed on March 23, 2021. |
| (s) | Incorporated by reference to the same numbered exhibit of the Current Report on Form 8-K filed on July 9, 2021. |
| (t) | Same as Exhibit 10.20. |
| 48 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
Date: November 15, 2021
| MARIMED INC. | ||
| By: | /s/ Robert Fireman | |
| Robert Fireman | ||
President and Chief Executive Officer (Principal Executive Officer) |
||
| By: | /s/ Jon R. Levine | |
| Jon R. Levine | ||
Chief Financial Officer (Principal Financial Officer) |
||
| 49 |
INDEX TO EXHIBITS
| 50 |
| 101.INS XBRL | Instance Document * | |
| 101.SCH XBRL | Taxonomy Extension Schema * | |
| 101.CAL XBRL | Taxonomy Extension Calculation Linkbase * | |
| 101.DEF XBRL | Taxonomy Extension Definition Linkbase * | |
| 101.LAB XBRL | Taxonomy Extension Label Linkbase * | |
| 101.PRE XBRL | Taxonomy Extension Presentation Linkbase * | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * |
| 51 |
* Filed herewith.
** Furnished herewith in accordance with Item 601 (32)(ii) of Regulation S-K.
*** This exhibit is a management contract or compensatory plan or arrangement.
| (a) | Incorporated by reference to the same numbered exhibit of the Registration Statement on Form 10-12G (File No. 000-54433) filed on June 9, 2011. |
| (b) | Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2016, filed on April 17, 2017. |
| (c) | Incorporated by reference to the Current Report on Form 8-K filed on November 9, 2018. |
| (d) | Incorporated herein by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A, filed on August 26, 2019. |
| (e) | Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q for the period ended September 30, 2019, filed on November 29, 2019. |
| (f) | Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed on February 12, 2020. |
| (g) | Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on February 12, 2020. |
| (h) | Incorporated by reference to the Current Report on Form 8-K filed on February 27, 2020. |
| (i) | Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended June 30, 2020, filed on May 28, 2020. |
| (j) | Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed on June 30, 2020. |
| (k) | Incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K filed on June 30, 2020. |
| (l) | Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on June 30, 2020. |
| (m) | Incorporated by reference to the same numbered exhibit of the Current Report on Form 8-K filed on October 26, 2020. |
| (n) | Incorporated by reference to Exhibit 10.13 of the Current Report on Form 8-K filed on October 26, 2020. |
| (o) | Incorporated by reference to the same numbered exhibit of the Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 29, 2013. |
| (p) | Incorporated by reference to the same numbered exhibit of the Current Report on Form 8-K filed on March 2, 2021. |
| (q) | Incorporated by reference to the same numbered exhibit of the Annual Report on Form 10-K for the year ended December 31, 2020, filed on March 23, 2021. |
| (r) | Incorporated by reference to the exhibit of the Current Report on Form 8-K filed on March 23, 2021. |
| (s) | Incorporated by reference to the same numbered exhibit of the Current Report on Form 8-K filed on July 9, 2021. |
| (t) | Same as Exhibit 10.20. |
| 52 |