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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 June 30, 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 August 5, 2022, 338,693,855 shares of the registrant’s common stock were outstanding.

 

 

 

 
 

 

MariMed Inc.

Table of Contents

 

    Page
  PART I – FINANCIAL INFORMATION  
     
Cautionary Note Regarding Forward-Looking Statements 3
     
Item 1. Financial Statements 4
     
  Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (unaudited) 4
     
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited) 6
     
  Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2022 and 2021 (unaudited) 7
     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (unaudited) 8
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 10
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
     
Item 3. Quantitative and Qualitative Disclosure About Market Risk 37
     
Item 4. Controls and Procedures 37
     
  PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 38
     
Item 1A. Risk Factors 38
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
     
Item 3. Defaults Upon Senior Securities 38
     
Item 4. Mine Safety Disclosures 38
     
Item 5. Other Information 39
     
Item 6. Exhibits 39
     
Signature 41

 

2
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to MariMed Inc. that is based on the beliefs of MariMed Inc.’s management, as well as assumptions made by and information currently available to the Company. In some cases, you can identify these statements by forward-looking words such as “anticipates,” “believes,” “could,” “should,” “estimates,” “expects,” “intends,” “may,” “plans,” “predicts,” “projects,” “will,” or other similar or comparable words. Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical facts may be deemed to be forward-looking statements. Such statements reflect the current views of the Company with respect to future events, including consummation of pending transactions, launch of new products, expanded distribution of existing products, obtaining new licenses, estimates and projections of revenue, EBITDA and Adjusted EBITDA and other information about its business, business prospects and strategic growth plan which are based on certain assumptions of its management, including those described in this Quarterly Report on Form 10-Q. These statements are not a guarantee of future performance and involve risk and uncertainties that are difficult to predict, including, among other factors, changes in demand for the Company’s services and products, changes in the law and its enforcement, timing and outcome of regulatory processes and changes in the economic environment.

 

Additional important factors that could cause actual results to differ materially from those in these forward-looking statements are also discussed in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Any forward-looking statement made by the Company in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

3
 

 

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

 

MariMed Inc.

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

(unaudited)

 

   June 30,   December 31, 
   2022   2021 
Assets          
Current assets:          
Cash and cash equivalents  $7,911    29,683 
Accounts receivable, net   5,297    1,666 
Deferred rents receivable   737    1,678 
Notes receivable, current portion   132    127 
Inventory   15,889    9,768 
Investments, current   525    251 
Other current assets   3,059    1,440 
Total current assets   33,550    44,613 
Property and equipment, net   69,132    62,150 
Intangible assets, net   9,898    162 
Goodwill   8,079    2,068 
Notes receivable, net of current   9,116    8,987 
Operating lease right-of-use assets   5,071    5,081 
Finance lease right-of-use assets   541    46 
Other assets   491    98 
Total assets  $135,878   $123,205 
           
Liabilities, mezzanine equity and stockholders’ equity          
Current liabilities:          
Mortgages and notes payable, current portion  $2,734   $1,410 
Accounts payable   7,624    5,099 
Accrued expenses and other   3,473    3,149 
Income taxes payable   10,001    16,467 
Operating lease liabilities, current portion   1,201    1,071 
Finance lease liabilities, current portion   180    27 
Total current liabilities   25,213    27,223 
Mortgages and notes payable, net of current   20,629    17,262 
Operating lease liabilities, net of current   4,420    4,574 
Finance lease liabilities, net of current   338    22 
Other liabilities   100    100 
Total liabilities   50,700    49,181 
           
Commitments and contingencies   -     -  

 

4
 

 

MariMed Inc.

Condensed Consolidated Balance Sheets (continued)

(in thousands, except per share amounts)

(unaudited)

 

   June 30,   December 31, 
   2022   2021 
Mezzanine equity:          
Series B convertible preferred stock, $0.001 par value; 4,908,333 shares authorized, issued and outstanding at June 30, 2022 and December 31, 2021   14,725    14,725 
Series C convertible preferred stock $0.001 par value; 12,432,432 shares authorized; 6,216,216 shares issued and outstanding at June 30, 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; zero shares issued and outstanding at June 30, 2022 and December 31, 2021          
Common stock, $0.001 par value; 700,000,000 shares authorized; 338,693,855 and 334,030,348 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively   339    334 
Additional paid-in capital   139,951    134,920 
Accumulated deficit   (91,381)   (97,392)
Noncontrolling interests   (1,456)   (1,563)
Total stockholders’ equity   47,453    36,299 
Total liabilities, mezzanine equity and stockholders’ equity  $135,878   $123,205 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5
 

 

MariMed Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

   2022   2021   2022   2021 
   Three months ended   Six months ended 
   June 30,   June 30,   June 30,   June 30, 
   2022   2021   2022   2021 
                 
Revenue  $32,986   $32,569   $64,268   $57,212 
Cost of revenue   17,981    13,163    32,287    24,620 
Gross profit   15,005    19,406    31,981    32,592 
                     
Operating expenses:                    
Personnel   3,382    2,058    6,424    3,785 
Marketing and promotion   809    270    1,452    495 
General and administrative   5,565    4,282    11,793    7,453 
Acquisition-related and other   754    -    754    - 
Bad debt   -    794    14    1,819 
Total operating expenses   10,510    7,404    20,437    13,552 
                     
Income from operations   4,495    12,002    11,544    19,040 
                     
Interest and other (expense) income:                    
Interest expense   (440)   (265)   (753)   (1,777)
Interest income   318    36    481    70 
Other (expense) income, net   (727)   (371)   275    (417)
Total interest and other (expense) income   (849)   (600)   3    (2,124)
                     
Income before income taxes   3,646    11,402    11,547    16,916 
Provision for income taxes   1,750    3,813    5,410    5,017 
                     
Net income   1,896    7,589    6,137    11,899 
Net income attributable to noncontrolling interests   73    96    126    186 
Net income attributable to common stockholders  $1,823   $7,493   $6,011   $11,713 
                     
Net income per share attributable to common stockholders:                    
Basic  $0.01   $0.02   $0.02   $0.04 
Diluted  $0.00   $0.02   $0.02   $0.03 
                     
Weighted average common shares outstanding:                    
Basic   337,497    324,267    336,137    321,741 
Diluted   379,626    370,257    379,225    365,324 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6
 

 

MariMed Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

(unaudited)

 

   Shares   Par value   Shares   Amount   capital   deficit   interests   equity 
   Six months ended June 30, 2022 
          

Common stock

subscribed but

   Additional       Non-   Total 
   Common stock   not issued  

paid-in

   Accumulated   controlling   stockholders’ 
   Shares   Par value   Shares   Amount   capital   deficit   interests   equity 
Balances at January 1, 2022   334,030,348   $334    -   $-   $134,920   $(97,392)  $(1,563)  $36,299 
Exercise of stock options   10,000         -     -     3              3 
Cashless exercise of stock options   200,000                                  - 
Cashless exercise of warrants   234,961                                  - 
Release of shares under stock grants   356,938                                  - 
Shares issued as purchase consideration - business acquisition   2,343,750    3    -     -     1,497              1,500 
Purchase of minority interests in certain of the Company’s subsidiaries             -     -     (2,165)        165    (2,000)
Stock issued as payment of fees   375,000    1              273              274 
Conversion of promissory notes to stock   1,142,858    1              399              400 
Distributions to non-controlling interests                                 (184)   (184)
Stock-based compensation             -     -     5,024              5,024 
Net income                            6,011    126    6,137 
Balances at June 30, 2022   338,693,855   $339    -   $-   $139,951   $(91,381)  $(1,456)  $47,453 

 

   Shares   Par value   Shares   Amount   capital   deficit   interests   equity 
   Six months ended June 30, 2021 
          

Common stock

subscribed but

   Additional       Non-   Total 
   Common stock   not issued  

paid-in

   Accumulated   controlling   stockholders’ 
   Shares   Par value   Shares   Amount   capital   deficit   interests   equity 
Balances at January 1, 2021   314,418,812   $314    11,413   $5   $112,975   $(104,617)  $(577)  $8,100 
Issuance of subscribed shares   11,413         (11,413)   (5)   5              - 
Exercise of stock options   82,885                   9              9 
Exercise of warrants   698,812    1              60              61 
Release of shares under stock grants   6,877                                  - 
Conversion of debentures payable to equity   4,610,645    5              1,352              1,357 
Conversion of promissory notes to equity   6,937,400    7              2,253              2,260 
Stock issued to settle obligations   71,691                   53              53 
Equity issuance costs                       (387)             (387)
Distributions to non-controlling interests             -     -               (183)   (183)
Stock-based compensation                       1,600              1,600 
Net income                            11,713    186    11,899 
Balances at June 30, 2021   326,838,535   $327    -   $-   $117,920   $(92,904)  $(574)  $24,769 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

7
 

 

MariMed Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   June 30,   June 30, 
   Six months ended June 30, 
   2022   2021 
Cash flows from operating activities:          
Net income attributable to common stockholders  $6,011   $11,713 
Net income attributable to noncontrolling interests   126    186 
Adjustments to reconcile net income to cash provided by operating activities:          
Depreciation and amortization of property and equipment   1,552    963 
Amortization of intangible assets   425    346 
Stock-based compensation   5,024    1,600 
Amortization of warrants attached to debt   -    539 
Amortization of beneficial conversion feature   -    177 
Amortization of original issue discount   -    52 
Bad debt expense   14    1,819 
Fees paid with stock   274    - 
Loss on obligations settled with equity   -    3 
(Gain) loss on changes in fair value of investments   679    415 
Other investment income   (954)   - 
Changes in operating assets and liabilities:          
Accounts receivable, net   (3,554)   (3,230)
Deferred rents receivable   99    125 
Inventory   (1,795)   (2,398)
Other current assets   (1,267)   (1,373)
Other assets   (392)   (17)
Accounts payable   2,024    1,699 
Accrued expenses and other   180    4,973 
Income taxes payable   (6,467)   - 
Net cash provided by operating activities   1,979    17,592 
           
Cash flows from investing activities:          
Purchases of property and equipment   (7,854)   (7,976)
Business acquisitions, net of cash acquired   (12,746)   - 
Purchases of cannabis licenses   (330)   (638)
Proceeds from notes receivable   73    - 
Interest on notes receivable   -    119 
Net cash used in investing activities   (20,857)   (8,495)

 

8
 

 

MariMed Inc.

Condensed Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)

 

   Six months ended June 30, 
   2022   2021 
Cash flows from financing activities:          
Proceeds from issuance of preferred stock   -    23,000 
Equity issuance costs   -    (387)
Proceeds from issuance of promissory notes   -    35 
Principal payments of mortgages and promissory notes   (611)   (16,098)
Proceeds from exercise of stock options   3    9 
Proceeds from exercise of warrants   -    61 
Repayment of loans from related parties   -    (1,158)
Principal payments of finance leases   (102)   (18)
Redemption of minority interests   (2,000)   - 
Distributions   (184)   (183)
Net cash (used in) provided by financing activities   (2,894)   5,261 
           
Net (decrease) increase in cash and cash equivalents   (21,772)   14,358 
Cash and equivalents, beginning of year   29,683    2,999 
Cash and cash equivalents, end of period  $7,911   $17,357 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $647   $1,405 
Cash paid for income taxes  $11,877   $419 
           
Non-cash activities:          
Stock issued as purchase consideration  $1,500   $- 
Conversion of promissory notes  $400   $2,260 
Conversions of debentures payable  $-   $1,356 
Operating lease right-of-use assets and liabilities  $322   $466 
Finance lease right-of-use assets and liabilities  $519   $- 
Common stock issued to settle obligations  $-   $51 
Issuance of common stock associated with subscriptions  $-   $5 
Cashless exercise of warrants  $-   $180 
Cashless exercise of stock options  $-   $53 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

9
 

 

MariMed Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

(1) BASIS OF PRESENTATION

 

Business

 

MariMed Inc. (“MariMed” or the “Company”) is a multi-state operator in the United States cannabis industry. MariMed 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. MariMed also licenses its proprietary brands of cannabis and hemp-infused products, along with other top brands, in domestic markets and overseas.

 

Basis of Presentation

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

On April 27, 2022 (the “Kind Acquisition Date”), the Company acquired Kind Therapeutics USA (“Kind”). The financial results of Kind are included in the Company’s condensed consolidated financial statements for the period subsequent to the Kind Acquisition Date.

 

Interim results are not necessarily indicative of results for the full fiscal year or any future interim period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), which was filed with the U.S. Securities and Exchange Commission (“SEC”) on March 16, 2022.

 

Certain reclassifications, not affecting previously reported net income or cash flows, have been made to the previously issued financial statements to conform to the current period presentation.

 

Significant Accounting Policies

 

The Company’s significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in the Annual Report. There were no material changes to the significant accounting policies during the three- or six-month periods ended June 30, 2022.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of MariMed and its wholly- and majority-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

 

Noncontrolling interests represent third-party minority ownership interests in the Company’s majority-owned consolidated subsidiaries. Net income attributable to noncontrolling interests is reported in the condensed consolidated statements of operations, and the value of minority-owned interests are presented as a component of equity within the condensed consolidated balance sheets.

 

Use of Estimates and Judgments

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenue and expenses during the reporting periods. Significant estimates and judgments relied upon in preparing these condensed consolidated financial statements include accounting for business combinations, inventory valuations, assumptions used to determine the fair value of stock-based compensation, and intangible asset and goodwill. Actual results could differ from those estimates.

 

10
 

 

Cash and 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 June 30, 2022 and December 31, 2021, the Company had cash of $0.1 million and $5.1 million held in escrow, respectively. The amount recorded at December 31, 2021 included a $5.0 million escrow deposit in connection with the acquisition of Kind.

 

Fair Value of Financial Instruments

 

The carrying amounts of the Company’s financial instruments approximate their fair values and include cash equivalents, accounts receivable, deferred rents receivable, notes receivable, mortgages and notes payable, and accounts payable.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tier fair value hierarchy is based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

 

Level 1. Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2. Level 2 applies to assets or liabilities for which there are inputs that are directly or indirectly observable in the marketplace, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets).

 

Level 3. Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

Recent Accounting Pronouncements

 

The Company has reviewed all recently issued, but not yet effective, Accounting Standards Updates (“ASUs”) and does not believe that the future adoption of any such ASUs will have a material impact on its financial condition or results of operations.

 

(2) ACQUISITIONS

 

Kind

 

In December 2021, the Company entered into a membership interest purchase agreement with the members of Kind, the Company’s client in Maryland that holds licenses for the cultivation, production, and dispensing of medical cannabis, to acquire 100% of the equity ownership of Kind in exchange for $13.5 million payable in cash (subject to certain adjustments) 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 (collectively, the “Kind Consideration”). Upon execution of the membership interest purchase agreement, the Company deposited $5.0 million into escrow as a contract down payment.

 

In April 2022, the Maryland Medical Cannabis Commission approved the Company’s acquisition of Kind, and the acquisition was completed on the Kind Acquisition Date (the “Kind Acquisition”). Following the Kind Acquisition, the Maryland litigation between the Company and the members of Kind was dismissed (see Note 18).

 

The Company believes that the Kind Acquisition allows it to expand its operations into the Maryland cannabis industry and marketplace.

 

The Kind Acquisition has been accounted for as a business combination and the financial results of Kind have been included in the Company’s condensed consolidated financial statement for the period subsequent to the Kind Acquisition Date. The Company’s financial results for the three and six months ended June 30, 2022 include $1.7 million of revenue and a net loss of $0.3 million attributable to Kind.

 

11
 

 

A summary of the preliminary allocation of Kind Consideration to the acquired assets, identifiable intangible assets and certain assumed liabilities is as follows (in thousands):

 

Fair value of consideration transferred:     
Cash consideration:     
Cash paid at closing  $10,128 
Release of escrow   2,444 
Severance paid from escrow   556 
Less cash acquired   (2,310)
Net cash consideration   10,818 
Note payable   5,634 
Write-off accounts receivable   658 
Write-off of deferred accounts receivable   842 
Total fair value of consideration transferred  $17,952 

 

Fair value of assets acquired and (liabilities assumed):     
Current assets, net of cash acquired  $5,047 
Property and equipment   622 
Intangible assets:     
Tradename and trademarks   2,041 
Licenses and customer base   4,700 
Non-compete agreements   42 
Goodwill   6,011 
Current liabilities   (511)
Total fair value of assets acquired and (liabilities assumed)  $17,952 

 

The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired tradename/trademarks, licenses/customer base, and non-compete intangible assets. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company’s estimates of new markets, products and customers and its outcome through key assumptions driving asset values, including sales growth, royalty rates and other related costs.

 

The Company is amortizing the identifiable intangible assets arising from the Kind Acquisition in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 5.77 years (see Note 9). Goodwill results from assets that are not separately identifiable as part of the transaction and is not deductible for tax purposes.

 

Concurrent with entering into 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. Upon the dismissal in June 2022 of the derivative claims in the DiPietro lawsuit (see Note 18), the Company paid the aggregate purchase consideration of $2.0 million, and the transaction was completed, increasing the Company’s ownership of Mari-MD and Mia to 99.7% and 94.3%, respectively.

 

12
 

 

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. (“Green Growth”), an entity that holds a craft cultivation and production cannabis license issued by the Illinois Department of Agriculture, in exchange for $1.9 million in cash and shares of the Company’s common stock valued at $1.5 million. Concurrently, the Company made a good faith deposit of $100,000.

 

In April 2022, the Illinois Department of Agriculture approved the Company’s acquisition of Green Growth, and the purchase transaction (the “Green Growth Acquisition”) was completed on May 5, 2022 (the “Green Growth Acquisition Date”). The Company paid the remaining $1.8 million in cash and issued 2,343,750 shares of common stock to the sellers on the Green Growth Acquisition Date. With this license, the Company can cultivate up to 14,000 square feet of cannabis flowers and produce cannabis concentrates. The Company believes that the acquisition of this cannabis license will allow it to be vertically integrated in Illinois by growing cannabis and producing cannabis products that can be distributed and sold at the Company-owned Thrive dispensaries and sold into the robust wholesale cannabis marketplace.

 

The Company has allocated the purchase price to its licenses/customer base intangible asset on a preliminary basis. The Company recorded approximately $57,000 of amortization expense in the three months ended June 30, 2022 for the intangible asset acquired based on an estimated ten-year life for such assets.

 

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 stock and cash aggregating $2.8 million.

 

The carrying value of the noncontrolling interest of approximately $975,000 was eliminated on the date such interest was acquired, and as there was no change in control of Meditaurus from this transaction, the resulting gain on bargain purchase was recognized in Additional paid-in capital in the condensed consolidated balance sheet. As part of this transaction, the initial purchase agreement was amended, eliminating all future license fees and payments to the prior owners of Meditaurus.

 

Pending Transactions

 

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 prior to the end of 2022. Concurrent with the execution of this agreement, the parties entered into a consulting agreement under which the Company provides certain oversight services related to the development, staffing, and operation of the business in exchange for a monthly fee.

 

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 holder of a cannabis cultivation license in the state of Nevada. The acquisition is conditioned upon state regulatory approval of the transaction and other closing conditions. The regulatory approval process for license transfers in Nevada has experienced significant delays as a result of multiple factors including the impact of Covid. Additionally, the progress of this acquisition has been delayed as a result of actions taken by the Nevada Cannabis Control Board (“CCB”) relating to regulatory operating violations by Harvest and its current ownership. Harvest is in process of negotiating a settlement with the CCB to resolve these violations which will allow it to proceed with the sale. The Company is monitoring the status of Harvest matters which may require adjustments to the purchase agreement.

 

The purchase agreement provides for a purchase price 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 were issued as a good faith deposit 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 regulatory 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 regulatory approval of the transaction. The issued shares were recorded at par value. Such shares are restricted and are to be returned to the Company in the event the transaction does not close.

 

13
 

 

Upon approval of the transfer, and the fulfillment of other closing conditions, if achieved, 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.

 

(3) EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted net earnings per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period, unless the effect is antidilutive.

 

The calculations of shares used to compute net earnings per share were as follows (in thousands):

 

   2022   2021   2022   2021 
   Three months ended   Six months ended 
   June 30,   June 30,   June 30,   June 30, 
   2022   2021   2022   2021 
                 
Weighted average shares outstanding - basic   337,497    324,267    336,137    321,741 
Potential dilutive common shares   42,129    45,990    43,088    43,583 
Weighted average shares outstanding - diluted   379,626    370,257    379,225    365,324 

 

(4) 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 in Deferred rents receivable in the condensed consolidated balance sheets. 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 its cannabis-licensed client under a triple net lease that expires in 2035.
     
  Maryland – a 180,000 square foot cultivation and processing facility that expires in 2037. This facility had been leased to Kind prior to the Kind Acquisition Date.
     
  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 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.

 

14
 

 

The Company received rental payments aggregating $0.8 million and $2.0 million in the three and six months ended June 30, 2022, respectively, and $1.2 million and $2.4 million in the three and six months ended June 30, 2021, respectively. Revenue from these rental receipts was recognized on a straight-line basis and aggregated $0.8 million and $1.9 million in the three and six months ended June 30, 2022, respectively, and $1.1 million and $2.3 million in the six months ended June 30, 2021, respectively.

 

Future minimum rental receipts for non-cancellable leases and subleases as of June 30, 2022 were as follows (in thousands):

 

Year ending December 31,    
Remainder of 2022  $1,085 
2023   1,911 
2024   1,925 
2025   1,946 
2026   1,868 
Thereafter   11,366 
Total  $20,101 

 

(5) NOTES RECEIVABLE

 

Notes receivable, including accrued interest, at June 30, 2022 and December 31, 2021 consisted of the following (in thousands):

 

   June 30,
2022
   December 31,
2021
 
First State Compassion Center (initial note)  $367   $403 
First State Compassion Center (secondary note)   8,002    7,845 
Healer LLC   879    866 
Total notes receivable   9,248    9,114 
Notes receivable, current portion   132    127 
Notes receivable, less current portion  $9,116   $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 for $0.7 million, bearing interest at a rate of 12.5% per annum and maturing in April 2026, as amended (the “FSCC Initial Note”). The monthly payments on the FSCC Initial Note approximate $10,000. At June 30, 2022 and December 31, 2021, the current portions of the FSCC Initial Note were approximately $80,000 and $75,000, respectively, and were included in Notes receivable, current, in the condensed consolidated balance sheets.

 

In December 2021, the Company converted financed trade accounts receivable balances from FSCC aggregating $7.8 million into notes receivable, whereby FSCC issued promissory notes aggregating $7.8 million to the Company (the “FSCC Secondary Notes”). The FSCC Secondary Notes bear interest of 6.0% per annum and mature in December 2025. FSCC is required to make periodic payments of principal and interest throughout the term of the FSCC Secondary Notes. At June 30, 2022, the FSCC Secondary Notes balance included approximately $54,000 of unpaid accrued interest.

 

15
 

 

Healer LLC

 

In March 2021, the Company was issued a promissory note in the principal amount of approximately $0.9 million from Healer LLC, an entity that provides cannabis education, dosage programs, and products developed by Dr. Dustin Sulak (“Healer”). The principal balance of the note represents previous loans extended to Healer by the Company of $0.8 million, plus accrued interest through the revised promissory note issuance date of approximately $94,000 (the “Revised Healer Note”). The Revised Healer Note bears interest at a rate of 6.0% per annum and requires quarterly payments of interest through the April 2026 maturity date.

 

The Company has the right to offset any licensing fees payable by the Company to Healer 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 Healer Note, reducing the principal amount to approximately $866,000. Of the outstanding Revised Healer Note balance at both June 30, 2022 and December 31, 2021, approximately $52,000 was current.

 

High Fidelity

 

In August 2021, a $250,000 loan to High Fidelity Inc., an entity with cannabis operations in the state of Vermont, which bore interest at a rate of 10.0% per annum, was repaid in full.

 

(6) INVENTORY

 

Inventory at June 30, 2022 and December 31, 2021 consisted of the following (in thousands):

 

   June 30,
2022
   December 31,
2021
 
Plants  $1,430   $1,015 
Ingredients and other raw materials   498    262 
Work-in-process   8,262    4,661 
Finished goods   5,699    3,830 
Total inventory  $15,889   $9,768 

 

(7) INVESTMENTS

 

The Company’s investments at June 30, 2022 and December 31, 2021 were comprised of the following (in thousands):

 

   June 30,
2022
   December 31,
2021
 
Investments – current:          
Flowr Corp. (formerly Terrace Inc.)  $124   $251 
WM Technology Inc.   401    - 
Total current investments  $525   $251 

 

The Company did not have any noncurrent investments at June 30, 2022 or December 31, 2021.

 

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”). In accordance with the purchase agreement for this transaction, each shareholder of Terrace received 0.4973 shares in Flowr for each Terrace share held (the “Flowr Investment”).

 

The Flowr Investment is recorded at fair value, with changes in fair value recorded as a component of Other (expense) income, net, in the condensed consolidated statements of operations. The Company recorded losses of $0.2 million and $0.1 million in the three and six months ended June 30, 2022, respectively, and a loss of $0.4 million in both of the three- and six-month periods ended June 30, 2021. These amounts represent the changes in the fair value of the Flowr Investment in the respective periods.

16
 

 

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 under which the Company returned membership interests comprising 11.0% ownership in MRSVP in exchange for a release of the Company from any further obligation to make any incremental investments or payments to MRSVP, 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. As a result, the Company no longer had the ability to exercise significant influence over MRSVP, and accordingly, as of January 1, 2021, the Company discontinued accounting for this investment under the equity method.

 

In September 2021, MRSVP sold substantially all of its assets pursuant to an asset purchase agreement. In connection with this transaction, the Company received cash proceeds of $1.5 million, which represented 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 $0.3 million, which gain was reported as a component of Other (expense) income, net.

 

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 could include securities or other forms of non-cash or in-kind consideration and holdback amounts, if and when 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, which represented the Company’s pro rata share of the additional consideration received by MRSVP pursuant to the asset purchase agreement. The Company recognized a loss of $0.6 million in both of the three- and six-month periods ended June 30, 2022, which are included as components of Other (expense) income, net, in the condensed consolidated statements of operations for those periods. This amount represents the change in the fair value of the MAPS shares in the respective periods.

 

(8) PROPERTY AND EQUIPMENT, NET

 

The Company’s property and equipment, net, at June 30, 2022 and December 31, 2021 was comprised of the following (in thousands):

 

   June 30,
2022
   December 31,
2021
 
Land  $4,450   $4,450 
Buildings and building improvements   38,672    35,231 
Tenant improvements   16,990    9,745 
Furniture and fixtures   1,973    1,888 
Machinery and equipment   9,466    7,221 
Construction in progress   5,897    10,569 
Property and equipment, gross   77,448    69,104 
Less: accumulated depreciation   (8,316)