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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period ended September 30, 2021

 

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

 

For the transition period from __________________ to __________________

 

Commission File number 0-54433

 

MARIMED INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   27-4672745
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

10 Oceana Way

Norwood, MA 02062

(Address of Principal Executive Offices)

 

617-795-5140

(Registrant’s Telephone Number, Including Area Code)

 

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. Yes ☒ No ☐

 

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

 

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

 

Large Accelerated filer ☐ Accelerated filer ☐
Non-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 ☐ No

 

As of November 15, 2021, 333,144,567 shares of the registrant’s common stock were outstanding.

 

 

 

 
 

 

MariMed Inc.

Table of Contents

 

    Page
  PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020 3
     
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited) 4
     
  Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2021 and 2020 (Unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited) 6
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
     
Item 3. Quantitative and Qualitative Disclosure About Market Risk 43
     
Item 4. Controls and Procedures 43
     
  PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 44
     
Item 1A. Risk Factors 44
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
     
Item 3. Defaults Upon Senior Securities 44
     
Item 4. Mine Safety Disclosures 44
     
Item 5. Other Information 44
     
Item 6. Exhibits 45
     
Signatures 49

 

2
 

 

MariMed Inc.

Condensed Consolidated Balance Sheets

 

   September 30,   December 31, 
   2021   2020 
   (Unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $25,580,508   $2,999,053 
Accounts receivable, net   8,706,467    6,675,512 
Deferred rents receivable   1,747,803    1,940,181 
Notes receivable, current portion   124,426    658,122 
Inventory   10,993,963    6,830,571 
Investments   419,803    1,357,193 
Other current assets   2,213,348    582,589 
Total current assets   49,786,318    21,043,221 
           
Property and equipment, net   59,516,169    45,636,529 
Intangibles, net   2,348,948    2,228,560 
Investments   -    1,165,788 
Notes receivable, less current portion   1,188,478    965,008 
Right-of-use assets under operating leases   5,245,577    5,247,152 
Right-of-use assets under finance leases   53,908    78,420 
Other assets   97,951    80,493 
Total assets  $118,237,349   $76,445,171 
           
Liabilities, mezzanine equity, and stockholders’ equity          
Current liabilities:          
Accounts payable  $7,092,073   $5,044,918 
Accrued expenses   11,094,752    3,621,269 
Sales and excise taxes payable   1,725,618    1,053,693 
Debentures payable   -    1,032,448 
Notes payable, current portion   9,705    8,859,175 
Mortgages payable, current portion   1,412,545    1,387,014 
Operating lease liabilities, current portion   1,097,008    1,008,227 
Finance lease liabilities, current portion   30,288    38,412 
Due to related parties   -    1,157,815 
Other current liabilities   -    23,640 
Total current liabilities   22,461,989    23,226,611 
           
Notes payable, less current portion   925,871    10,682,234 
Mortgages payable, less current portion   16,974,749    14,744,136 
Operating lease liabilities, less current portion   4,717,933    4,822,064 
Finance lease liabilities, less current portion   27,856    44,490 
Other liabilities   100,200    100,200 
Total liabilities   45,208,598    53,619,735 
           
Mezzanine equity:          
Series B convertible preferred stock, $0.001 par value; 4,908,333 shares authorized, issued and outstanding at September 30, 2021 and December 31, 2020   14,725,000    14,725,000 
Series C convertible preferred stock, $0.001 par value; 6,216,216 and zero shares authorized, issued and outstanding at September 30, 2021 and December 31, 2020, respectively   23,000,000    - 
Total mezzanine equity   37,725,000    14,725,000 
           
Stockholders’ equity:          
Undesignated preferred stock, $0.001 par value; 38,875,451 and 45,091,667 shares authorized at September 30, 2021 and December 31, 2020, respectively; zero shares issued and outstanding at September 30, 2021 and December 31, 2020   -    - 
Common stock, $0.001 par value; 700,000,000 and 500,000,000 shares authorized at September 30, 2021 and December 31, 2020, respectively; 331,545,220 and 314,418,812 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively   331,545    314,419 
Common stock subscribed but not issued; 202,204 and 11,413 shares at September 30, 2021 and December 31, 2020, respectively   189,184    5,365 
Additional paid-in capital   127,231,090    112,974,329 
Accumulated deficit   (90,883,748)   (104,616,538)
Noncontrolling interests   (1,564,320)   (577,139)
Total stockholders’ equity   35,303,751    8,100,436 
Total liabilities, mezzanine equity, and stockholders’ equity  $118,237,349   $76,445,171 

 

See accompanying notes to condensed consolidated financial statements.

 

3
 

 

MariMed Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

   2021   2020   2021   2020 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2021   2020   2021   2020 
                 
Revenues  $33,208,060   $13,461,504   $90,420,280   $30,537,829 
                     
Cost of revenues   15,027,521    4,781,677    39,647,473    10,831,763 
                     
Gross profit   18,180,539    8,679,827    50,772,807    19,706,066 
                     
Operating expenses:                    
Personnel   1,481,350    1,354,644    5,266,745    4,075,168 
Marketing and promotion   563,193    103,327    1,057,892    281,329 
General and administrative   9,481,030    2,931,684    16,933,758    7,515,721 
Bad debts   35,583    892,029    1,854,869    1,342,029 
Total operating expenses   11,561,156    5,281,684    25,113,264    13,214,247 
                     
Operating income   6,619,383    3,398,143    25,659,543    6,491,819 
                     
Non-operating income (expenses):                    
Interest expense   (299,969)   (1,921,312)   (2,076,587)   (7,581,648)
Interest income   25,739    34,818    95,534    121,712 
Loss on obligations settled with equity   -    -    (2,546)   (44,678)
Equity in earnings of investments   -    51,511    -    18,553 
Change in fair value of investments   (522,106)   217,374    (937,390)   (704,172)
Other   309,212    (84,708)   309,212    (84,708)
Total non-operating income (expenses), net   (487,124)   (1,702,317)   (2,611,777)   (8,274,941)
                     
Income (loss) before income taxes   6,132,259    1,695,826    23,047,766    (1,783,122)
Provision for income taxes   4,009,111    -    9,026,016    - 
Net income (loss)  $2,123,148   $1,695,826   $14,021,750   $(1,783,122)
                     
Net income (loss) attributable to noncontrolling interests  $103,113   $36,959   $288,960   $193,492 
Net income (loss) attributable to MariMed Inc.  $2,020,035   $1,658,867   $13,732,790   $(1,976,614)
                     
Net income (loss) per share                    
Basic  $0.01   $0.01   $0.04   $(0.01)
Diluted  $0.01   $0.00   $0.04   $(0.01)
                     
Weighted average common shares outstanding                    
Basic   329,454,104    281,535,212    324,340,006    254,387,761 
Diluted   378,934,045    346,091,840    370,203,937    254,387,761 

 

See accompanying notes to condensed consolidated financial statements.

 

4
 

 

MariMed Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

   Shares   Par Value   Shares   Amount   Capital   Deficit   Interests   Equity 
   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   228,408,024   $228,408    3,236,857   $1,168,074   $112,245,730   $(106,760,527)  $(553,465)   6,328,220 
                                         
Issuance of subscribed shares   3,236,857    3,237    (3,236,857)   (1,168,074)   1,164,837    -    -    - 
Stock grants   64,478    64    33,319    5,365    10,665    -    -    16,094 
Stock forfeiture   (40,000)   (40)   -    -    40    -    -    - 
Amortization of option grants   -    -    -    -    707,003    -    -    707,003 
Issuance of stand-alone warrants   -    -    -    -    2,179    -    -    2,179 
Issuance of warrants attached to debt   -    -    -    -    638,927    -    -    638,927 
Discount on debentures payable   -    -    -    -    28,021    -    -    28,021 
Beneficial conversion feature on debentures payable   -    -    -    -    379,183    -    -    379,183 
Conversion of debentures payable   54,143,232    54,144    -    -    7,111,897    -    -    7,166,041 
Conversion of common stock to preferred stock   (4,908,333)   (4,908)   -    -    (14,720,092)   -    -    (14,725,000)
Conversion of promissory note   2,525,596    2,525    -    -    457,525    -    -    460,050 
Extinguishment of promissory note   1,900,000    1,900    -    -    350,100    -    -    352,000 
Common stock issued to settle obligations   4,400,000    4,400    -    -    739,200    -    -    743,600 
Distributions   -    -    -    -    -    -    (229,329)   (229,329)
Net income (loss)   -    -    -    -    -    (1,976,614)   193,492    (1,783,122)
Balances at September 30, 2020   289,729,854   $289,730    33,319   $5,365   $109,115,215   $(108,737,141)  $(589,302)  $83,867 

 

   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   314,418,812   $314,419    11,413   $5,365   $112,974,329   $(104,616,538)  $(577,139)   8,100,436 
                                         
Issuance of subscribed shares   11,413    11    (11,413)   (5,365)   5,354    -    -    - 
Stock grants   152,094    152    102,204    95,284    137,932    -    -    233,368 
Exercise of options   178,885    179    -    -    31,321    -    -    31,500 
Exercise of warrants   980,062    980    -    -    91,795    -    -    92,775 
Amortization of option grants   -    -    -    -    6,208,376    -    -    6,208,376 
Issuance of stand-alone warrants   -    -    -    -    832,105    -    -    832,105 
Issuance of warrants with stock   -    -    -    -    654,681    -    -    654,681 
Conversion of debentures payable   4,610,645    4,611    -    -    1,351,841    -    -    1,356,452 
Conversion of promissory notes   10,042,125    10,042    -    -    3,336,403    -    -    3,346,445 
Common stock issued to settle obligations   71,691    72    -    -    53,473    -    -    53,545 
Purchase of property and equipment with stock   750,000    750    -    -    704,250    -    -    705,000 
Fees paid with stock   409,308    409    -    -    374,610    -    -    375,019 
Return of stock   (79,815)   (80)   -    -    (9,857)   -    -    (9,937)
Equity issuance costs   -    -    -    -    (386,983)   -    -    (386,983)
Acquisition of 30% interest in subsidiary   -    -    100,000    93,900    871,460    -    (975,360)   (10,000)
Distributions   -    -    -    -    -    -    (300,781)   (300,781)
Net income   -    -    -    -    -    13,732,790    288,960    14,021,750 
Balances at September 30, 2021   331,545,220   $331,545    202,204   $189,184   $127,231,090   $

(90,883,748

)  $(1,564,320)  $35,303,751 

 

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)

 

   2021   2020 
   Nine Months Ended September 30, 
   2021   2020 
Cash flows from operating activities:          
Net income (loss) attributable to MariMed Inc.  $

13,732,790

   $(1,976,614)
Net income (loss) attributable to noncontrolling interests   288,960    193,492 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation   1,499,318    1,340,649 
Asset writeoff   -    84,708 
Amortization of intangibles   518,182    307,861 
Amortization of stock grants   233,368    16,094 
Amortization of option grants   6,208,376    707,003 
Amortization of stand-alone warrant issuances   832,105    2,179 
Amortization of warrants attached to debt   539,272    631,895 
Amortization of warrants issued with stock   654,681    - 
Amortization of beneficial conversion feature   176,522    2,552,933 
Amortization of original issue discount   51,753    286,353 
Bad debt expense   1,854,869    1,342,029 
Fees paid with stock   375,019    - 
Loss on obligations settled with equity   2,546    44,678 
Equity in earnings of investments   -    (18,553)
Change in fair value of investments   937,390    704,172 
Gain on sale of investment   (309,212)    =
Changes in operating assets and liabilities:          
Accounts receivable, net   (3,885,824)   (3,750,792)
Deferred rents receivable   192,378    (171,675)
Inventory   (4,163,392)   (5,582,862)
Other current assets   (1,640,696)   (57,677)
Other assets   (17,458)   95,412 
Accounts payable   2,098,155    2,272,810 
Accrued expenses   7,432,580    1,263,976 
Sales and excise taxes payable   671,925    608,716 
Operating lease payments, net   (13,775)   58,559 
Finance lease interest payments   1,504    4,033 
Other current liabilities   (23,640)   646,832 
Net cash provided by operating activities   28,247,696    1,606,211 
           
Cash flows from investing activities:          
Purchase of property and equipment   (14,649,446)   (4,116,053)
Purchase of cannabis licenses   (638,570)   (255,000)
Return on investment   1,475,000    - 
Interest on notes receivable   407,374    443,150 
Net cash used in investing activities   (13,405,642)   (3,927,903)
           
Cash flows from financing activities:          
Proceeds from issuance of preferred stock   23,000,000    - 
Equity issuance costs   (386,983)   - 
Proceeds from issuance of promissory notes   35,096    5,249,763 
Repayments of promissory notes   (15,804,273)   (10,770,011)
Proceeds from issuance of debentures   -    935,000 
Proceeds from mortgages   2,700,000    13,897,282 
Payments on mortgages   (443,856)   (4,989,661)
Proceeds from exercise of options   31,500    - 
Proceeds from exercise of warrants   92,775    - 
Due to related parties   (1,157,815)   (221,705)
Finance lease principal payments   (26,262)   (27,008)
Distributions   (300,781)   (229,329)
Net cash provided by financing activities   7,739,401    3,844,331 
           
Net change to cash and cash equivalents   22,581,455    1,522,639 
Cash and cash equivalents at beginning of period   2,999,053    738,688 
Cash and cash equivalents at end of period  $25,580,508   $2,261,327 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $1,705,029   $1,236,464 
Cash paid for income taxes  $419,070   $488,772 
           
Non-cash activities:          
Conversion of promissory notes  $3,346,445   $460,050 
Conversions of debentures payable  $1,356,452   $7,166,041 
Acquisition of 30% interest in subsidiary  $975,360   $- 
Purchase of property and equipment with stock  $705,000   $- 
Operating lease right-of-use assets and liabilities  $466,105   $- 
Common stock issued to settle obligations  $51,000   $698,922 
Return of stock  $9,937   $- 
Issuance of common stock associated with subscriptions  $5,365   $1,168,074 
Cashless exercise of warrants  $180   $- 
Cashless exercise of stock options  $53   $- 
Exchange of common stock to preferred stock  $-   $14,725,000 
Conversion of accrued interest to promissory notes  $-   $3,908,654 
Discount on promissory notes  $-   $638,927 
Beneficial conversion feature on debentures payable  $-   $379,183 
Extinguishment of promissory note  $-   $352,000 
Discount on debentures payable  $-   $28,021 

 

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 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™.

 

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.   100.0%
Mia Development LLC   89.5%
Mari Holdings IL LLC   100.0%
Mari Holdings MD LLC   97.4%
Mari Holdings NV LLC   100.0%
Mari Holdings Metropolis LLC   70.0%
Mari Holdings Mt. Vernon LLC   100.0%
Hartwell Realty Holdings LLC   100.0%
iRollie LLC   100.0%
ARL Healthcare Inc.   100.0%
KPG of Anna LLC   100.0%
KPG of Harrisburg LLC   100.0%
MariMed Hemp Inc.   100.0%
MediTaurus LLC   100.0%

 

Intercompany accounts and transactions have been eliminated.

 

Use of Estimates

 

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

 

Cash Equivalents

 

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

 

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

 

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 $41.4 million and $40.0 million at September 30, 2021 and December 31, 2020, respectively. For further discussion on receivable reserves, please refer to Note 18 – Bad Debts and the Bankruptcy Claim section of Note 20 – Commitments and Contingencies.

 

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, forty years; tenant improvements, the remaining duration of the related lease; furniture and fixtures, seven to ten years; machinery and equipment, ten years. Land is not depreciated.

 

The Company’s property and equipment are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable 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   3.0 to 5.0 years    2.7 to 4.3 years 
Volatility factors   1.230 to 1.266    1.059 to 1.180 
Risk-free interest rates   0.36% to 0.90%    0.26% to 1.30% 
Dividend yield   0%    0% 

 

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

 

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

 

Extinguishment of Liabilities

 

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

 

Stock-Based Compensation

 

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

 

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 no adjustments to unrecognized income tax liabilities or benefits for the nine months ended September 30, 2021 or 2020.

 

Related Party Transactions

 

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

 

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

 

Comprehensive Income

 

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

 

Earnings Per Share

 

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

 

As of September 30, 2021 and 2020, there were potentially dilutive securities convertible into shares of common stock comprised of (i) stock options – convertible into 26,054,171 and 7,125,750 shares, respectively, (ii) warrants – convertible into 27,802,734 and 17,735,107 shares, respectively, (iii) Series B preferred stock – convertible into 4,908,333 shares in both periods, (iv) Series C preferred stock – convertible into 31,081,080 and zero shares, respectively, (v) debentures payable – convertible into zero and 28,233,972 shares, respectively, and (vi) promissory notes – convertible into 2,500,268 and 17,503,282 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 49,479,941 shares and 45,863,932 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 64,556,628 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.

 

12
 

 

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 100% of the ownership interests of The Harvest Foundation LLC (“Harvest”), the Company’s cannabis-licensed client in the state of Nevada. The acquisition is conditioned upon legislative approval of the transaction. During 2019, the state paused the processing of cannabis license transfers, without indicating when it will resume. Upon the resumption of these activities and the ensuing approval by the state, the Company expects to consummate this transaction whereby the operations of Harvest will be consolidated into the Company’s financial statements.

 

The purchase price is comprised of the issuance of (i) 1,000,000 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) $1.2 million of the Company’s common stock at closing, based on the closing price of the common stock on the day prior to legislative approval of the transaction, and (iii) warrants to purchase 400,000 shares of the Company’s common stock at an exercise price equal to the closing price of the Company’s common stock on the day prior to legislative approval of the transaction. The issued shares were recorded at par value. Such shares are restricted and will be returned to the Company in the event the transaction does not close.

 

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 70% by the Company and 30% by the members of Kind, subject to approval by the Maryland Medical Cannabis Commission (“MMCC”). Prior to finalizing the documents confirming the partnership/joint venture, in December 2018, the Company and the members of Kind negotiated and entered into a memorandum of understanding (“MOU”) for the Company to acquire 100% of the membership interests of Kind. The MOU provides for a total purchase price of $6.3 million in cash, 2,500,000 shares of the Company’s common stock, and other consideration. The acquisition is subject to approval by the MMCC, which will be applied for following the resolution of the litigation with Kind discussed below.

 

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 20-year lease with Kind for Kind’s utilization of the Company’s 180,000 square foot cultivation and production facility in Hagerstown, MD (“the Lease”), which the Company purchased, designed, and developed for occupancy and use by Kind commencing in late 2017. Additionally, in October 2019, Mari Holdings MD LLC purchased a 9,000 square foot building in Anne Arundel County, MD, which is currently under construction, for the development of a dispensary which would be leased to Kind.

 

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 70% ownership interest in MediTaurus LLC (“MediTaurus”), a company formed by Jokubas Ziburkas PhD, a neuroscientist and leading authority on cannabidiol (“CBD”) and the endocannabinoid system, in exchange for $2.8 million of cash and stock. The Company currently sells CBD products developed by MediTaurus under its Florance™ brand.

 

In September 2021, the Company acquired the remaining 30% ownership interest of MediTaurus in exchange for 100,000 shares of the Company’s common stock, valued at approximately $94,000, and $10,000 in cash. The carrying value of the noncontrolling interest of approximately $975,000 was eliminated, and since there was no change in control of MediTaurus from this transaction, the resulting gain on bargain purchase was recognized in Additional Paid-In Capital on the September 30, 2021 balance sheet. The shares and cash were issued and paid in November 2021, and were included in Common Stock Subscribed But Not Issued and Accrued Expenses, respectively, on the September 30, 2021 balance sheet. As part of this transaction, the initial purchase agreement was amended whereby any and all future license fees and payments to MediTaurus were eliminated.

 

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.)  $419,803   $1,357,193 
           
Non-current investments:          
MembersRSVP LLC   -    1,165,788 
           
Total investments  $419,803   $2,522,981 

 

Flowr Corp. (formerly Terrace Inc.)

 

In December 2020, Terrace Inc., a Canadian cannabis entity in which the Company had an ownership interest of 8.95% (“Terrace”), was acquired by Flowr Corp. (TSX.V: FLWR; OTC: FLWPF), a Toronto-headquartered cannabis company with operations in Canada, Europe, and Australia (“Flowr”). Under the terms of the transaction, each shareholder of Terrace received 0.4973 of a share in Flowr for each Terrace share held.

 

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 $937,000 and $446,000, respectively, was reflected in Change In Fair Value Of Investments on the statement of operations.

 

MembersRSVP LLC

 

In August 2018, the Company invested $300,000 and issued 378,259 shares of its common stock, valued at approximately $915,000, in exchange for a 23% ownership in MembersRSVP LLC (“MRSVP”), an entity that has developed cannabis-specific customer relationship management software, branded under the name Sprout.

 

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 $52,000 and $19,000, respectively. Such earnings comprised the balance of Equity in Earnings of Investments on the statement of operations for such periods.

 

In January 2021, the Company and MRSVP entered into an agreement whereby the Company assigned and transferred membership interests comprising an 11% ownership in MRSVP in exchange for a release from all further obligation by the Company to make future investments or payments and certain other non-monetary consideration. Following the interest transfer, the Company’s ownership interest in MRSVP was reduced to 12% on a fully diluted basis.

 

As part of the agreement, the Company relinquished its right to appoint a me