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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 March 31, 2022

 

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 May 10, 2022, 335,793,167 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 March 31, 2022 (Unaudited) and December 31, 2021   3
       
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021 (Unaudited)   4
       
  Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (Unaudited)   5
       
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (Unaudited)   6
       
  Notes to Condensed Consolidated Financial Statements (Unaudited)   7
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   30
       
Item 3. Quantitative and Qualitative Disclosure About Market Risk   36
       
Item 4. Controls and Procedures   36
       
  PART II – OTHER INFORMATION    
       
Item 1. Legal Proceedings   37
       
Item 1A. Risk Factors   37
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   37
       
Item 3. Defaults Upon Senior Securities   37
       
Item 4. Mine Safety Disclosures   37
       
Item 5. Other Information   37
       
Item 6. Exhibits   38
       
Signatures   41

 

2

 

 

MariMed Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and par value amounts)

 

   March 31,   December 31, 
   2022   2021 
   (unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $33,467   $29,683 
Accounts receivable, net   3,462    1,666 
Deferred rents receivable   1,586    1,678 
Notes receivable, current portion   129    127 
Inventory   12,238    9,768 
Investments   1,253    251 
Other current assets   2,179    1,440 
Total current assets   54,314    44,613 
           
Property and equipment, net   65,482    62,150 
Intangibles, net   2,395    2,230 
Investments   100    - 
Notes receivable, less current portion   9,104    8,987 
Right-of-use assets under operating leases   4,913    5,081 
Right-of-use assets under finance leases   576    46 
Other assets   98    98 
Total assets  $136,982   $123,205 
           
Liabilities, mezzanine equity, and stockholders’ equity          
Current liabilities:          
Accounts payable  $8,311   $5,099 
Accrued expenses   1,728    1,349 
Income taxes payable   20,059    16,467 
Sales and excise taxes payable   1,355    1,798 
Notes payable, current portion   10    10 
Mortgages payable, current portion   1,416    1,400 
Operating lease liabilities, current portion   1,128    1,071 
Finance lease liabilities, current portion   178    27 
Other current liabilities   -    2 
Total current liabilities   34,185    27,223 
           
Notes payable, less current portion   46    448 
Mortgages payable, less current portion   16,624    16,814 
Operating lease liabilities, less current portion   4,343    4,574 
Finance lease liabilities, less current portion   372    22 
Other liabilities   100    100 
Total liabilities   55,670    49,181 
           
Mezzanine equity:          
Series B convertible preferred stock, $0.001 par value; 4,908,333 shares authorized, issued and outstanding at March 31, 2022 and December 31, 2021   14,725    14,725 
Series C convertible preferred stock, $0.001 par value; 12,432,432 shares authorized at March 31, 2022 and December 31, 2021; 6,216,216 shares issued and outstanding at March 31, 2022 and December 31, 2021   23,000    23,000 
Total mezzanine equity   37,725    37,725 
           
Stockholders’ equity:          
Undesignated preferred stock, $0.001 par value; 38,875,451 shares authorized at March 31, 2022 and December 31, 2021; zero shares issued and outstanding at March 31, 2022 and December 31, 2021   -    - 
Common stock, $0.001 par value; 700,000,000 shares authorized at March 31, 2022 and December 31, 2021; 335,558,206 and 334,030,348 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively   336    334 
Common stock subscribed but not issued; 2,717 and zero shares at March 31, 2022 and December 31, 2021, respectively   2    - 
Additional paid-in capital   138,064    134,920 
Accumulated deficit   (93,204)   (97,392)
Noncontrolling interests   (1,611)   (1,563)
Total stockholders’ equity   43,587    36,299 
Total liabilities, mezzanine equity, and stockholders’ equity  $136,982   $123,205 

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

 

MariMed Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts; unaudited)

 

   2022   2021 
   Three Months Ended
March 31,
 
   2022   2021 
Revenues  $31,282   $24,643 
           
Cost of revenues   14,306    11,457 
           
Gross profit   16,976    13,186 
           
Operating expenses:          
Personnel   3,042    1,727 
Marketing and promotion   643    225 
General and administrative   6,228    3,171 
Bad debts   14    1,025 
Total operating expenses   9,927    6,148 
           
Operating income   7,049    7,038 
           
Non-operating income (expenses):          
Interest expense   (313)   (1,512)
Interest income   163    34 
Loss on obligations settled with equity   -    (1)
Gain (loss) on change in fair value of investment   48    (45)
Other investment income   954    -
Total non-operating income (expenses), net   852   (1,524)
           
Income before income taxes   7,901    5,514 
Provision for income taxes   3,660    1,204 
Net income  $4,241   $4,310 
           
Net income attributable to noncontrolling interests  $53   $90 
Net income attributable to MariMed Inc.  $4,188   $4,220 
           
Net income per share          
Basic  $0.01   $0.01 
Diluted  $0.01   $0.01 
           
Weighted average common shares outstanding          
Basic   334,762,825    305,212,269 
Diluted   378,890,365    340,825,940 

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

 

MariMed Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts; 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, 2020   314,418,812   $314    11,413   $5   $112,974   $(104,615)  $(577)   8,101 
Issuance of subscribed shares   11,413    -    (11,413)   (5)   5    -    -    - 
Stock grants   -    -    6,877    5    -    -    -    5 
Exercise of warrants   50,000    -    -    -    8    -    -    8 
Amortization of option grants   -    -    -    -    295    -    -    295 
Issuance of stand-alone warrants   -    -    -    -    56    -    -    56 
Conversion of debentures payable   4,610,645    5    -    -    1,351    -    -    1,356 
Conversion of promissory notes   3,365,972    3    -    -    1,007    -    -    1,010 
Common stock issued to settle obligations   42,857    -    -    -    31    -    -    31 
Equity issuance costs   -    -    -    -    (387)   -    -    (387)
Distributions   -    -    -    -    -    -    (83)   (83)
Net income (loss)   -                  -    -    -    -    4,220    90    4,310 
Balances at March 31, 2021   322,499,699   $322    6,877   $          5   $115,340   $(100,395)  $         (570)  $     14,702 

 

   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, 2021   334,030,348   $334    -   $-   $134,920   $(97,392)  $(1,563)  $36,299 
Stock grants   -    -    2,717    2    -    -    -    2 
Exercise of options   10,000    -    -    -    3    -    -    3 
Amortization of option grants   -    -    -    -    2,469    -    -    2,469 
Conversion of promissory notes   1,142,858    1    -    -    399    -    -    400 
Fees paid with stock   375,000    1    -    -    273    -    -    274 
Distributions   -    -    -    -    -    -    (101)   (101)
Net income   -                  -    -    -    -    4,188    53    4,241 
Balances at March 31, 2022   335,558,206    336    2,717             2    138,064         (93,204)      (1,611)          43,587 

 

The above statements do not show columns for the shares and par value of 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

(in thousands; unaudited)

 

   2022   2021 
   Three Months Ended
March 31,
 
   2022   2021 
Cash flows from operating activities:          
Net income attributable to MariMed Inc.  $4,188   $4,220 
Net income attributable to noncontrolling interests   53    90 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   702    462 
Amortization of intangibles   140    177 
Amortization of stock grants   2    5 
Amortization of option grants   2,469    295 
Amortization of stand-alone warrant issuances   -    56 
Amortization of warrants attached to debt   -    539 
Amortization of beneficial conversion feature   -    177 
Amortization of original issue discount   -    52 
Bad debt expense   14    1,025 
Fees paid with stock   274    - 
Loss on obligations settled with equity   -    1 
Gain (loss) on change in fair value of investment   (48)   45 
Other investment income    

(954

)   - 
Changes in operating assets and liabilities:          
Accounts receivable, net   (1,810)   (1,691)
Deferred rents receivable   92    64 
Inventory   (2,470)   (624)
Other current assets   (739)   (434)
Other assets   -    (17)
Accounts payable   3,212    1,035 
Accrued expenses   217    (129)
Income taxes payable   3,592    1,204 
Sales and excise taxes payable   (443)   233 
Operating lease payments, net   (6)   (4)
Finance lease interest payments   7    2 
Other current liabilities   (2)   (24)
Net cash provided by operating activities   8,490    6,759 
           
Cash flows from investing activities:          
Purchase of property and equipment   (4,015)   (2,308)
Purchase of cannabis licenses   (305)   (638)
Investment in Green Growth Group, Inc.   (100)   - 
Interest on notes receivable   43    69 
Net cash used in investing activities   (4,377)   (2,877)
           
Cash flows from financing activities:          
Proceeds from issuance of preferred stock   -    23,000 
Equity issuance costs   -    (387)
Repayments of promissory notes   (2)   (15,801)
Payments on mortgages   (174)   (1,157)
Proceeds from exercise of options   3    - 
Proceeds from exercise of warrants   -    8 
Due to related parties   -    (132)
Finance lease principal payments   (55)   (10)
Distributions   (101)   (83)
Net cash (used in) provided by financing activities   (329)   5,438 
           
Net change to cash and cash equivalents   3,784    9,320 
Cash and cash equivalents at beginning of period   29,683    2,999 
Cash and cash equivalents at end of period  $33,467   $12,319 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $302   $1,092 
Cash paid for income taxes  $68   $14 
           
Non-cash activities:          
Finance lease right-of-use assets and liabilities  $514   $- 
Conversion of promissory notes  $400   $1,010 
Conversions of debentures payable  $-   $1,356 
Operating lease right-of-use assets and liabilities  $-   $466 
Common stock issued to settle obligations  $-   $30 
Issuance of common stock associated with subscriptions  $-   $5 

 

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.

 

Over the last few years, 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 businesses and manage the continuing growth of their operations.

 

To date, the Company’s acquisition and consolidation of its cannabis-licensed clients’ retail businesses in Illinois and retail and wholesale businesses in Massachusetts have been completed. In April 2022, the acquisition of its client’s wholesale business in Maryland, and a third-party wholesale business in Illinois were consummated. The acquisitions of clients’ retail and wholesale businesses in Nevada and Delaware are at various stages of completion and subject to each state’s laws governing the ownership transfer of cannabis licenses and other closing conditions. Delaware will require a modification of current cannabis ownership laws to permit for-profit ownership, which is expected to occur when the state legalizes recreational adult-use cannabis. Until the law changes and the acquisition is approved, the Company continues to generate revenue from rental income, management fees, and licensing royalties.

 

In addition to the aforementioned acquisitions of its cannabis-licensed clients, in February 2022, the Company was notified that it was awarded a cannabis dispensary license from the state of Ohio, for which it had previously applied. The Company is awaiting the final verification process to be completed by the state before commencing cannabis operations in this state.

 

The Company’s transition to a fully integrated muti-state cannabis operator (“MSO”) is part of a strategic growth plan (the “Strategic Growth Plan”) it 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 expanding into additional states with legal cannabis programs.

 

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 quality 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 product recipes.

 

The Company markets its high-quality cannabis flowers and concentrates under the award-winning1 Nature’s Heritage brand; chewable tablets under the brand names Kalm Fusion and K Fusion; all natural fruit chews under the award-winning1 Betty’s Eddies brand; brownies, cookies, and other social sweets under the Bubby’s Baked brand; and powder drink mixes under the Vibations: High + Energy brand. The Company’s brands have been top-selling products in Maryland and Massachusetts.2 The Company intends to introduce additional product lines under these brands in the foreseeable future.

 

The Company also has strategic alliances with prominent brands. The Company has partnered with renowned 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 was incorporated in Delaware in January 2011 under the name Worlds Online Inc. The Company’s stock is quoted on the OTCQX market under the ticker symbol MRMD. In April 2022, the Company applied to list its shares of common stock on the Canadian Securities Exchange, which application is currently pending.

 

 

1 Awards won by the Company’s Betty’s Eddies brand include LeafLink 2021 Best Selling Medical Product, Reddit Sparkie 2021 Best Edible, Respect My Region 2021 Hottest Edible, LeafLink 2020 Industry Innovator, and Explore Maryland Cannabis 2020 Edible of the Year. Awards won by the Company’s Nature’s Heritage brand include the Cultivators Cup 2021 Silver Medal and the High Times Cannabis Cup 2021 Bronze Medal.

 

2 Source: LeafLink Insights 2020.

 

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, 2021.

 

Certain reclassifications may have been made to prior periods’ presentation to conform to the current period presentation. These reclassifications had no effect on previously reported income 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 March 31, 2022:

 

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 NJ LLC   100.0% 
Mari Holdings NV LLC   100.0% 
Mari Holdings Metropolis LLC   70.0% 
Mari Holdings Mt. Vernon LLC   100.0% 
Mari Mfg 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 OH 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.

 

At both March 31, 2022 and December 31, 2021, cash of approximately $5,101,000 was held in escrow, primarily comprised of a $5,000,000 escrow deposit in connection with the acquisition of Kind Therapeutics USA LLC as further discussed in Note 3 – Acquisitions.

 

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 at both March 31, 2022 and December 31, 2021. 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 reserve if necessary. As of the date of this report, no reserve was deemed 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 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 primarily by the Company’s retail dispensaries and wholesale operations in Massachusetts and Illinois. 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 – resale of cultivation and production resources, supplies, and equipment, acquired by the Company from top national vendors at volume discounted prices, to its clients and third-parties within the cannabis industry. The Company recognizes this revenue after the delivery and acceptance of goods by the purchaser.
     
  Licensing – revenue from the sale of Company’s branded products including Betty’s Eddies and Kalm Fusion, and from the 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; and 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.

 

In the three months ended March 31, 2022 and 2021, 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. Under ASC 842, arrangements that are determined to be leases with a term greater than one year are accounted for by the recognition of right-of-use assets, that represent the Company’s right to use an underlying asset for the lease term, and lease liabilities, that 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 three months ended March 31, 2022 and 2021:

 

   Three Months Ended
March 31,
 
   2022   2021 
Life of instrument   *    3.0 to 5.0 years 
Volatility factors   *    1.230 to 1.266 
Risk-free interest rates   *    0.36% to 0.85% 
Dividend yield   *    0% 

 

*No options or warrants were issued by the Company during the three months ended March 31, 2022.

 

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 three months ended March 31, 2022 and 2021.

 

Certain of the Company’s subsidiaries are subject to the provisions of Section 280E of the Internal Revenue Code, as amended, which prohibits businesses from deducting certain expenses associated with the trafficking of controlled substances within the meaning of Schedule I and II of the Controlled Substances Act. Such non-deductibility of certain ordinary business expenses results in permanent differences and can cause the Company’s effective tax rate to be highly variable and not necessarily correlated with pre-tax income.

 

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 periods 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.

 

At March 31, 2022 and 2021, there were potentially dilutive securities convertible into shares of common stock comprised of (i) stock options – convertible into 39,811,671 and 11,017,750 shares, respectively, (ii) warrants – convertible into 26,351,571 and 32,282,708 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 shares in both periods, and (v) promissory notes – convertible into zero and 10,705,513 shares, respectively.

 

For the three months ended March 31, 2022 and 2021, the aforementioned potentially dilutive securities increased the number of weighted average common shares outstanding on a diluted basis by 44,127,540 and 35,613,671 shares, respectively. Such share amounts were reflected in the calculation of diluted net income per share for such periods.

 

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.

 

Recent Accounting Pronouncements

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements, and does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.

 

13

 

 

NOTE 3 – ACQUISITIONS

 

Kind Therapeutics USA LLC

 

In December 2021, the Company entered into a membership interest purchase agreement with the members of Kind Therapeutics USA LLC, the Company’s client in Maryland that holds licenses for the cultivation, production, and dispensing of medical cannabis (“Kind”), to acquire 100% of the equity ownership of Kind in exchange for $13.5 million payable in cash (subject to adjustment) and $6.5 million payable by the issuance of four-year 6.0% promissory notes to the members of Kind, secured by a first priority lien on the Company’s property in Hagerstown, MD. Upon execution of the membership interest purchase agreement, the Company deposited, in escrow, the sum of $5.0 million as a contract down-payment.

 

In April 2022, the Maryland Medical Cannabis Commission approved the Company’s acquisition of Kind, and the acquisition was consummated by the parties. Accordingly, Kind will be consolidated into the financial results of the Company commencing on the closing date of the acquisition. Following the closing of the transaction, the Maryland litigation between the Company and the members of Kind was dismissed as further discussed in Note 20 – Commitments and Contingencies.

 

Simultaneous with the Kind membership purchase agreement, the Company entered into a membership interest purchase agreement with one of the members of Kind to acquire such member’s entire equity ownership interest in (i) Mari Holdings MD LLC (“Mari-MD”), the Company’s majority owned subsidiary that owns production and retail cannabis facilities in Hagerstown, MD and Annapolis, MD, and (ii) Mia Development LLC (“Mia”), the Company’s majority owned subsidiary that owns production and retail cannabis facilities in Wilmington, DE. The purchase price of $2 million in the aggregate is expected to be paid, and the transaction consummated, upon the dismissal of the derivative claims in the DiPietro lawsuit in June 2022, as further discussed in Note 20 – Commitments and Contingencies. After this transaction is consummated, the Company’s ownership of Mari-MD and Mia shall increase to 99.7% and 94.3%, respectively.

 

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 state regulatory approval of the transaction and other closing conditions. Upon approval, and the fulfillment of other closing conditions, the ownership of Harvest will be transferred to the Company, and the operations of Harvest will begin to be consolidated into the Company’s financial statements. There is no assurance that the closing conditions to the Company’s acquisition of Harvest, including regulatory approval, will be achieved or that the acquisition will be consummated.

 

The purchase price is comprised of the issuance of (i) 1,000,000 shares of the Company’s common stock, in the aggregate, to the 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.

 

Meditaurus LLC

 

In September 2021, the Company acquired the remaining 30.0% ownership interest of Meditaurus LLC, a developer of CBD products sold under the Florance brand name (“Meditaurus”), in exchange for 100,000 shares of the Company’s common stock, valued at approximately $94,000, and $10,000 in cash. In 2019, the Company had acquired a 70.0% ownership interest in Meditaurus in exchange for $2.8 million of cash and stock.

 

The carrying value of the noncontrolling interest of approximately $975,000 was eliminated on the date such interest was acquired in September 2021, 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 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.

 

Beverly Asset Purchase

 

In November 2021, the Company entered into an asset purchase agreement to acquire the cannabis license, property lease, and other assets and rights of, and to assume the liabilities and operating obligations associated with, a cannabis dispensary that is currently operating in Beverly, MA. The purchase price is comprised of 2,000,000 shares of the Company’s common stock and $5.1 million in cash, with the cash amount to be paid on a monthly basis as a percentage of the business’ monthly gross sales.

 

The purchase is contingent upon the approval of the Massachusetts Cannabis Control Commission, which is expected during the third quarter of 2022. Concurrent with the execution of this agreement, the parties entered into a consulting agreement pursuant whereby the Company shall provide certain oversight services related to the development, staffing, and operation of the business in exchange for a monthly fee.

 

Green Growth Group Inc.

 

In January 2022, the Company entered into a stock purchase agreement to acquire 100% of the equity ownership of Green Growth Group Inc., an entity that holds a wholesale cannabis license in the state of Illinois, in exchange for $1.9 million in cash and shares of the Company’s common stock valued at $1.5 million. The Company made a good faith deposit of $100,000 on the agreement date, which comprises the balance of non-current Investments on the balance sheet. 

 

In March 2022, the acquisition was approved by the Illinois Department of Agriculture, and in April 2022, the parties consummated the transaction.

 

14

 

 

NOTE 4 – INVESTMENTS

 

At March 31, 2022 and December 31, 2021, the Company’s investments were comprised of the following (in thousands):

 

   March 31,
2022
   December 31,
2021
 
Current investments:          
Flowr Corp. (formerly Terrace Inc.)  $299   $251 
WM Technology Inc.   954    - 
Total current investments   1,253    251 
           
Non-current investments:          
Green Growth Group, Inc.   100    - 
MembersRSVP LLC   -    - 
           
Total investments  $1,353   $251 

 

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 deal, each shareholder of Terrace received 0.4973 of a share in Flowr for each Terrace share held.

 

This investment is carried at fair value. The increase in fair value of approximately $48,000 during the three months ended March 31, 2022, and the decrease in fair value of approximately $45,000 during the three months ended March 31, 2021, were reflected in the Gain (Loss) On Change In Fair Value Of Investment on the respective statement of operations.

 

Green Growth Group Inc.

 

In January 2022, the Company made a good faith deposit of $100,000 in connection with the acquisition of Green Growth Group, Inc. as previously discussed in Note 3 – Acquisitions.

 

MembersRSVP LLC

 

In January 2021, the Company and MembersRSVP LLC, an entity that develops cannabis-specific software (“MRSVP”), in which the Company owned a 23.0% membership interest, entered into an agreement whereby the Company returned membership interests comprising 11% ownership in MRSVP in exchange for a release from all further obligation by the Company to make future investments, payments, and certain other non-monetary consideration.

 

In addition to the reduction of the Company’s ownership interest to 12.0%, 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.

 

In September 2021, MRSVP sold substantially all of its assets pursuant to an asset purchase agreement. As a result of this agreement, the Company received cash proceeds of $1,475,000, representing the Company’s pro rata share of the cash consideration received by MRSVP at the closing of the transaction. The cash proceeds reduced the Company’s MRSVP investment balance to zero and resulted in a gain of approximately $309,000.

 

As an ongoing member of MRSVP, the Company was entitled to its pro rata share of any additional consideration received by MRSVP pursuant to the asset purchase agreement, which may include securities or other forms of non-cash or in-kind consideration and holdback amounts, if and when it is received and distributed by MRSVP. In February 2022, the Company received 121,968 shares of common stock of WM Technology Inc. (Nasdaq: MAPS), a technology and software infrastructure provider to the cannabis industry, representing the Company’s pro rata share of the additional consideration received by MRSVP pursuant to the asset purchase agreement. The fair value of these shares at March 31, 2022 of approximately $954,000 was reflected in current Investments on the balance sheet, and the corresponding gain comprised the balance of Other Investment Income on the statement of operations for the three months ended March 31, 2022.

 

15

 

 

NOTE 5 – DEFERRED RENTS RECEIVABLE

 

The Company is the lessor under operating leases which contain escalating rents over time, rent holidays, 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 45,000 square foot cannabis cultivation, processing, and dispensary facility which is leased to a cannabis-licensed client under a triple net lease that expires in 2035.
     
  Maryland – a 180,000 square foot cultivation and processing facility which is leased to a licensed cannabis client under a triple net lease that expires in 2037.
     
  Massachusetts – a 138,000 square foot industrial property of which approximately half of the available square footage is leased to a non-cannabis manufacturing company under a lease that expires in October 2022.

 

The Company subleases the following properties:

 

  Delaware – a 4,000 square foot cannabis dispensary which is subleased to its cannabis-licensed client under a under a sublease expiring in April 2027.
     
  Delaware – a 100,000 square foot warehouse, of which the Company developed 60,000 square feet into a cultivation facility that is subleased to its cannabis-licensed client. The sublease expires in March 2030, with an option to extend the term for three additional five-year periods. The Company intends to develop the remaining space into a processing facility.
     
  Delaware – a 12,000 square foot cannabis production facility with offices which is subleased to its cannabis-licensed client. The sublease expires in January 2026 and contains an option to negotiate an extension at the end of the lease term.

 

At March 31, 2022 and December 31, 2021, cumulative fixed rental receipts under such leases approximated $19.9 million and $18.7 million, respectively, compared to revenue recognized on a straight-line basis of approximately $21.5 million and $20.4 million, respectively. Accordingly, the deferred rents receivable balance approximated $1.6 million and $1.7 million at March 31, 2022 and December 31, 2021, respectively.

 

Future minimum rental receipts for non-cancellable leases and subleases as of March 31, 2022 were (in thousands):

 

     
2022  $3,620 
2023   4,563 
2024   4,626 
2025   4,695 
2026   3,916 
Thereafter   35,830 
Total  $57,250 

 

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NOTE 6 – NOTES RECEIVABLE

 

At March 31, 2022 and December 31, 2021, notes receivable, including accrued interest, consisted of the following (in thousands):

 

   March 31,
2022
   December 31,
2021
 
First State Compassion Center (initial note)  $385   $403 
First State Compassion Center (secondary note)   7,982    7,845 
Healer LLC   866    866 
High Fidelity Inc.   -    - 
Total notes receivable   9,233    9,114 
Notes receivable, current portion   129    127 
Notes receivable, less current portion  $9,104   $8,987 

 

First State Compassion Center

 

The Company’s cannabis-licensed client in Delaware, First State Compassion Center (“FSCC”), issued a 10-year promissory note to the Company in May 2016 in the amount of $700,000 bearing interest at a rate of 12.5% per annum, as amended. The monthly payments of approximately $10,000 will continue through April 2026, at which time the note will be paid in full. At March 31, 2022 and December 31, 2021, the current portion of this note approximated $77,000 and $75,000, respectively, and was included in Notes Receivable, Current Portion on the respective balance sheets.

 

In December 2021, financed trade accounts receivable balances from FSCC of approximately $7,845,000 in the aggregate were converted into notes receivable whereby FSCC issued promissory notes to the Company in the aggregate amount of approximately $7.8 million bearing interest at a rate of 6.0% per annum. The promissory notes call for the periodic payment of principal and interest throughout the term of the note which matures in December 2025. At March 31, 2022, the balance of the note included approximately $138,000 of unpaid accrued interest.

 

Healer LLC

 

In March 2021, the Company was issued a promissory note in the principal amount of approximately $894,000 from Healer LLC, an entity that provides cannabis education, dosage programs, and products developed by Dr. Dustin Sulak, an integrative medicine physician and nationally renowned cannabis practitioner (“Healer”). The principal balance of the note represents previous loans extended to Healer by the Company of $800,000 plus accrued interest through the revised promissory note issuance date of approximately $94,000. The revised promissory note bears interest at a rate of 6.0% per annum and requires quarterly payments of interest through the maturity date in April 2026.

 

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 $28,000 of licensing fees payable to Healer against the principal balance of the revised promissory note, reducing the principal amount to approximately $866,000. At both March 31, 2022 and December 31, 2021, approximately $52,000 was current.

 

High Fidelity

 

In August 2021, the Company was fully repaid on a loan to High Fidelity Inc., an entity with cannabis operations in the state of Vermont. The loan had a principal balance of $250,000 and bore interest at a rate of 10.0% per annum,

 

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NOTE 7 – INVENTORY

 

At March 31, 2022 and December 31, 2021, inventory was comprised of the following (in thousands):

 

   March 31,
2022
   December 31,
2021
 
Plants  $2,413   $1,015 
Ingredients and other raw materials   494    262 
Work-in-process   4,066    4,661 
Finished goods   5,265    3,830 
Total inventory  $12,238   $9,768 

 

NOTE 8 – PROPERTY AND EQUIPMENT

 

At March 31, 2022 and December 31, 2021, property and equipment consisted of the following (in thousands):

 

   March 31,
2022
   December 31,
2021
 
Land  $4,450   $4,450 
Buildings and building improvements   37,674    35,231 
Tenant improvements   16,819    9,745 
Furniture and fixtures   1,909    1,888 
Machinery and equipment   8,632    7,221 
Construction in progress   3,635    10,569 
    73,119    69,104 
Less: accumulated depreciation   (7,637)   (6,954)
Property and equipment, net  $65,482   $62,150 

 

During the three months ended March 31, 2022 and December 31, 2021, additions to property and equipment approximated $4,015,000 and $3,224,000, respectively.

 

The 2022 additions were primarily comprised of (i) the development of facilities in Annapolis, MD and Beverly, MA, and (ii) purchases of building improvements, machinery, and equipment at the facilities in Hagerstown, MD and New Bedford, MA. The 2021 additions consisted primarily of (i) the development of facilities in Annapolis, MD and Milford, DE, and (ii) purchases of building improvements, machinery, and equipment at the Hagerstown, MD facility and both facilities in Massachusetts.

 

The construction in progress balances of approximately $3,635,000 and $10,569,000 at March 31, 2022 and December 31, 2021, respectively, consisted of development of facilities in Annapolis, MD, Beverly, MA, and Milford, DE.

 

Depreciation expense for the three months ended March 31, 2022 and 2021 approximated $702,000 and $462,000, respectively.

 

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NOTE 9 – INTANGIBLES

 

At March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021, the carrying value of these cannabis licenses approximated $327,000 and $162,000, respectively.

 

The goodwill associated with acquisitions is reviewed on a quarterly basis for impairment. Based on this review and other factors, the goodwill of approximately $2,068,000 at March 31, 2022 and December 31, 2021 was deemed to be unimpaired.

 

NOTE 10 – MORTGAGES

 

At March 31, 2022 and December 31, 2021, mortgage balances, including accrued interest, were comprised of the following (in thousands):

 

   March 31,
2022
   December 31,
2021
 
Bank of New England – New Bedford, MA and Middleboro, MA properties  $12,409   $12,499 
Bank of New England – Wilmington, DE property   1,434    1,463 
DuQuoin State Bank – Anna, IL and Harrisburg, IL properties   770    778 
DuQuoin State Bank – Metropolis, IL property   2,607    2,658 
South Porte Bank – Mt. Vernon, IL property   820    816 
Total mortgages payable   18,040    18,214 
Mortgages payable, current portion   1,416    1,400 
Mortgages payable, less current portion  $16,624   $16,814 

 

The Company maintains an amended and restated mortgage agreement with the Bank of New England bearing interest at a rate of 6.5% per annum that matures in August 2025. This mortgage is secured by the Company’s properties in New Bedford, MA and Middleboro, MA. Proceeds from this mortgage were used to pay down a previous mortgage with the Bank of New England of approximately $4.8 million on the New Bedford property, and approximately $7.2 million of promissory notes as further discussed in Note 11 – Promissory Notes. At March 31, 2022 and December 31, 2021, the outstanding principal balance of this note approximated $12,409,000 and $12,499,000, respectively, of which approximately $364,000 and $358,000, respectively, was current.

 

The Company has a second mortgage with Bank of New England that is secured by the Company’s property in Wilmington, DE. The mortgage matures in 2031 with monthly principal and interest payments at a rate of 5.25% per annum through September 2021, and thereafter the rate adjusting every five years to the then prime rate plus 1.5% with a floor of 5.25% per annum. At September 2021, the interest rate remained at 5.25%. At March 31, 2022 and December 31, 2021, the outstanding principal balance on this mortgage approximated $1,434,000 and $1,463,000, respectively, of which approximately $122,000 and $120,000, respectively, was current.

 

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The Company maintains a mortgage agreement with DuQuoin State Bank (“DSB”) for its purchase of properties in Anna, IL and Harrisburg, IL. On May 5th of each year, this mortgage is due to be repaid unless it is renewed for another year at a rate determined by DSB’s executive committee. The mortgage was renewed in May 2021 at a rate of 6.75% per annum. At March 31, 2022 and December 31, 2021, the outstanding principal balance on this mortgage approximated $770,000 and $778,000 respectively, of which approximately $34,000 and $33,000, respectively, was current.

 

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 750,000 shares of the Company’s common stock, which were valued at $705,000 on the date of the transaction, and payoff of the seller’s remaining mortgage of approximately $1.6 million. In connection with this purchase, the Company entered into a second mortgage agreement with DSB in the amount of $2.7 million that matures in July 2041 and initially bears interest at a rate of 6.25% per annum which is adjusted each year based on a certain interest rate index plus a margin. As part of this transaction, the seller was provided with a 30.0% ownership interest in Mari Holdings Metropolis LLC (“Metro”), the Company’s subsidiary that owns the property and related mortgage obligation, reducing the Company’s ownership interest in Metro to 70.0%. At March 31, 2022 and December 31, 2021, the outstanding principal balance on this mortgage approximated $2,607,000 and $2,658,000, respectively, of which approximately $76,000 and $73,000 was current.

 

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 $6,000, which began in August 2021 and continues through its maturity in June 2022, at which time all remaining principal, interest and fees shall be due.

 

NOTE 11 – PROMISSORY NOTES

 

Promissory Note Retirements

 

In March 2021, utilizing a portion of the proceeds from the Hadron transaction discussed in Note 13 – Mezzanine Equity, the Company retired approximately $15.2 million of principal and interest on promissory notes issued in previous fiscal years to accredited individual and institutional investors. Additionally, a remaining debt discount of approximately $450,000 on one of the retired promissory notes (such discount having arisen from the issuance of warrants attached to such promissory note) was fully amortized in this month.

 

Promissory Note Conversions

 

During the three months ended March 31, 2021, the noteholder of an $8.8 million promissory note issued by the Company in June 2020 converted approximately $1.0 million of principal and $10,000 of accrued interest into 3,365,972 shares of the Company’s common stock. After such conversion and cash payments of $4.6 million in the second half of fiscal 2020, this $8.8 million promissory note was amended and restated into a new $3.2 million promissory note.

 

During 2021, in a series of transactions, the noteholder converted $2.8 million of principal into 8,033,296 shares of the Company’s common stock. At December 31, 2021, the outstanding balance on this note was $400,000.

 

During the three months ended March 31, 2022, the noteholder converted the remaining principal balance of $400,000 into 1,142,858 shares of the Company’s common stock. Upon this conversion, the $3.3 million note no longer had an outstanding balance and was retired. All of the aforementioned note conversions were effected within the terms of their respective note agreements, and the Company was not required to record a gain or loss on such conversions.

 

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 5.74% per annum and matures in July 2026. At March 31, 2022 and December 31, 2021, the balance of this note approximated $24,000 and $26,000, respectively, of which approximately $5,000 was current in both periods.

 

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 10.0% per annum and matures in May 2027. At March 31, 2022 and December 31, 2021, the balance of this note approximated $31,000 and $33,000, of which approximately $5,000 was current in both periods.

 

Promissory Note Issued by MariMed Hemp Inc.

 

In September 2020, the Company paid down $500,000 of principal on a $1.0 million promissory note issued in 2019 by MariMed Hemp Inc., the Company’s wholly-owned subsidiary. In March 2021, utilizing a portion of the proceeds from the Hadron transaction discussed in Note 13 – Mezzanine Equity, the Company paid interest on this note of $200,000 and paid off the remaining principal of $500,000.

 

At March 31, 2022 and December 31, 2021, the Company was carrying an accrued interest balance of approximately $125,000 to cover interest due on this note.

 

20

 

 

Debt Maturities

 

At March 31, 2022, the aggregate scheduled maturities of the Company’s total debt outstanding were (in thousands):

 

      
2022  $1,267 
2023   635 
2024   673 
2025   720 
2026   764 
Thereafter   14,037 
Total   18,096 

 

NOTE 12 – DEBENTURES PAYABLE

 

In a series of transactions from the period October 2018 through February 2020, the Company sold an aggregate of $21.0 million of convertible debentures (the “$21M Debentures”) to an unaffiliated investor pursuant to an amended securities purchase agreement.

 

As of March 31, 2021, the holder of the $21M Debentures had converted the entire $21.0 million of principal and related accrued interest into the Company’s common stock in a series of conversions, at conversion prices equal to 80.0% of a calculated average of the daily volume-weighted price preceding the date of conversion. Of these conversions, $1.3 million of principal and approximately $56,000 of accrued interest were converted into 4,610,645 shares of common stock at a conversion price of $0.29 per share during the three months ended March 31, 2021. Additionally, a remaining (i) original issue discount of approximately $52,000, (ii) debt discount of approximately $39,000 (such discount having arisen from the issuance of warrants attached to the $21M Debentures), and (iii) beneficial conversion feature of approximately $177,000 (such conversion feature having arisen from an in-the-money embedded conversion option on the commitment date), were fully amortized upon the final conversion of the $21M Debentures. All conversions were effected within the terms of the debenture agreements, and accordingly the Company was not required to record a gain or loss on such conversions.

 

NOTE 13 – MEZZANINE EQUITY

 

Series B Convertible Preferred Stock

 

In 2020, the Company entered into an exchange agreement with two institutional shareholders (the “Exchange Agreement”) whereby the Company (i) issued $4.4 million of promissory notes to the two institutional shareholders (such notes were retired in March 2021 as part of the promissory note retirements discussed in Note 11 – Promissory Notes), and (ii) exchanged 4,908,333 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.

 

In connection with the 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.

 

21

 

 

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 $3.00, 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 $3.00 per share, without the payment of additional consideration, and (ii) the Company has the option to convert all, but not less than all, shares of Series B convertible preferred stock into common stock at a conversion price of $3.00 if the daily volume weighted average price of common stock (the “VWAP”) exceeds $4.00 per share for at least twenty consecutive trading days prior to the date on which the Company gives notice of such conversion to the Series B Holders.

 

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:

 

If the sixty-day VWAP is less than or equal to $0.50 per share, the Company shall have the option to (i) convert all shares of Series B convertible preferred stock into common stock at a conversion price of $1.00 per share, and pay cash to the Series B Holders equal to the difference between the 60-day VWAP and $3.00 per share, or (ii) pay cash to the Series B Holders equal to $3.00 per share.

   

If the sixty-day VWAP is greater than $0.50 per share, the Company shall have the option to (i) convert all shares of Series B convertible preferred stock into common stock at a conversion price per share equal to the quotient of $3.00 per share divided by the sixty-day VWAP, or (ii) pay cash to the Series B Holders equal to $3.00 per share, or (iii) convert all shares of Series B convertible preferred stock into common stock at a conversion price per share equal to the sixty-day VWAP per share and pay cash to the Series B Holders at the difference between $3.00 per share and the sixty-day VWAP per share.

 

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.

 

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 $46.0 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 $23.0 million of Units at a price of $3.70 per Unit. Each Unit is comprised of one share of Series C preferred stock and a four-year warrant to purchase two and one-half shares of common stock. Accordingly, the Company issued to Hadron 6,216,216 shares of Series C preferred stock and warrants to purchase up to an aggregate of 15,540,540 shares of common stock. Each share of Series C preferred stock is convertible, at Hadron’s option, into five shares of common stock, and each warrant is exercisable at an exercise price of $1.087 per share. The warrants shall be subject to early termination if certain milestones are attained, and the market value of the Company’s common stock reaches certain predetermined levels. The fair value of the warrants of approximately $9.5 million on the issuance date was allocated to the proceeds and recorded as additional paid-in capital. The Company incurred costs of approximately $387,000 relative to the issuance of the aforementioned shares to Hadron which was recorded as a reduction to additional paid-in capital in March 2021.

 

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 $23.0 million of proceeds received by the Company in March 2021, approximately (i) $7.3 million was designated to fund construction and upgrades of certain of the Company’s owned and managed facilities, which was expended in 2021, and (ii) $15.7 million was used to pay down debt and related interest as discussed in Note 11 – Promissory Notes.

 

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The balance of the facility was designated to fund future acquisitions, including the Kind acquisition, on the same aforementioned terms as the initial proceeds. Notwithstanding, Hadron did not fund the cash portion of the Kind purchase price, and the Company is currently in negotiations with Hadron to amend and extend the facility to be utilized for future expansion opportunities. There is no assurance that any extension will be implemented.

 

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.

 

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 500 million 700 million.

 

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 40 million to 70 million.

 

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

 

During the three months ended March 31, 2022 and 2021, the Company granted 2,717 and 6,877 shares of common stock, respectively, to an employee for services in lieu of salary. These granted shares, with a fair value of approximately $2,000 in 2022 and $5,000 in 2021, were yet to be issued by the end of the respective quarter, and were reflected in Common Stock Subscribed But Not Issued on the balance sheet.

 

In March 2022, the Company issued 375,000 shares of common stock valued at approximately $274,000 in exchange for consulting services, In February 2021, the Company issued 42,857 shares of common stock to settle a $30,000 obligation. Based on the price of the Company’s common stock on the date of issuance, the Company incurred a non-cash loss of approximately $1,000 which was reflected under Loss On Obligations Settled with Equity on the statement of operations.

 

During the three months ended March 31, 2021, the Company issued 11,413 shares of common stock associated with previously issued subscriptions on common stock with a fair value of approximately $5,000. No such issuances were made during the three months ended March 31, 2022.

 

As previously disclosed in Note 11 – Promissory Notes, during the three months ended March 31, 2022 and 2021, the Company issued 1,142,858 shares common stock upon the conversion of $400,000 of principal in 2022 and 3,365,972 shares of common stock upon the conversion of approximately $1,010,000 of principal and interest in 2021 on promissory notes.

 

As previously disclosed in Note 12 – Debentures Payable, during the three months ended March 31, 2021, the Company issued 4,610,645 shares common stock upon the conversion of $1.3 million of principal and approximately $56,000 of accrued interest of the $21M Debentures.

 

As further disclosed in Note 15 – Options, during the three months ended March 31, 2022, 10,000 shares of common stock were issued in connection with the exercise of stock options. No stock options were exercised during the three months ended March 31, 2021.

 

As further disclosed in Note 16 – Warrants, during the three months ended March 31, 2021, warrants to purchase 50,000 shares of common stock were exercised. No warrants were exercised during the three months ended March 31, 2022.

 

Common Stock Issuance Obligations

 

At March 31, 2022 and 2021, the Company was obligated to issue 2,717 and 6,877 shares of common stock, valued at approximately $2,000 and $5,000, respectively, in connection with stock grants to an employee. The 2022 obligation was issued in May 2022; the 2021 obligations was issued in April 2021.

 

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NOTE 15 – STOCK OPTIONS

 

During the three months ended March 31, 2021, the Company granted five-year options to purchase up to 1,262,000 shares of common stock at exercise prices ranging from $0.51 to $0.90 per share. The fair value of these options of approximately $541,000 in the aggregate is being amortized to compensation expense over their vesting periods, of which approximately $170,000 was amortized during the three months ended March 31, 2021. No stock options were granted during the three months ended March 31, 2022.

 

Compensation expense in the first quarter of 2022 and 2021 for options issued in previous periods, and continuing to be amortized over their respective vesting periods, approximated $2,469,000 and $124,000, respectively.

 

During the three months ended March 31, 2022, options to purchase 10,000 shares of common stock were exercised at an exercise price of $0.30. No stock options were exercised during the three months ended March 31, 2021.

 

During the three months ended March 31, 2021, options to purchase 50,000 shares of common stock expired. No stock options expired during the three months ended March 31, 2022.

 

Stock options outstanding and exercisable as of March 31, 2022 were:

 

Exercise Price   Shares Under Option   Remaining Life 
per Share   Outstanding   Exercisable   in Years 
 $0.140    80,000    80,000    3.28 
 $0.149    500,000    500,000    3.76 
 $0.169    200,000    200,000    3.62 
 $0.225    2,000,000    1,625,000    3.61 
 $0.250    50,000    50,000    2.92 
 $0.250    20,000    20,000    3.17 
 $0.250    50,000    25,000    3.57 
 $0.250    800,000    800,000    3.62 
 $0.250    80,000    80,000    3.65 
 $0.300    388,000    388,000    3.00 
 $0.417    900,000    900,000    2.74 
 $0.505    100,000    100,000    3.76 
 $0.505    800,000    400,000    3.78 
 $0.590    15,000    15,000    2.69 
 $0.690    15,000    -    4.68 
 $0.693    500,000    -    4.69 
 $0.700    650,000    50,000    4.67 
 $0.740    520,000    425,625    4.08 
 $0.755    1,050,000    550,000    4.73 
 $0.770    200,000    200,000    0.75 
 $0.800    25,000    -    4.64 
 $0.830    287,000    287,000    3.98 
 $0.830    600,000    150,000    4.16 
 $0.840    878,921    878,921    4.29 
 $0.840    99,000    59,400    4.34 
 $0.850    90,000    49,375    4.21 
 $0.850    72,500    14,375    4.63 
 $0.870    250,000    -    4.76 
 $0.880    11,550,000    5,925,000    4.28 
 $0.880    15,000    7,500    4.37