NOTE 11 – DEBT

Mortgages Payable

At December 31, 2019 and 2018, mortgage balances, including accrued but unpaid interest, were comprised of the following:

In November 2017, the Company entered into a 10-year mortgage agreement with Bank of New England for the purchase of a 138,000 square foot industrial property in New Bedford, Massachusetts, within which the Company has built a 70,000 square foot cannabis cultivation and processing facility. This mortgage was personally guaranteed by the Company’s CEO and CFO. From the mortgage date through May 2019, the Company was required to make monthly payments of interest-only at a rate equal to the prime rate plus 2%, with a floor of 6.25% per annum. From May 2019 to May 2024, the Company is required to make principal and interest payments at a rate equal to the prime rate on May 2, 2019 plus 2%, with a floor of 6.25% per annum. Principal and interest payments shall continue from May 2024 through the end of the lease at a rate equal to the prime rate on May 2, 2024 plus 2%, with a floor of 6.25% per annum. The outstanding principal balance on this mortgage was approximately $4,825,000 and $4,895,000 on December 31, 2019 and 2018, respectively, of which approximately $94,000 and $63,000, respectively, was current.

The Company maintains a second mortgage with Bank of New England, also personally guaranteed by the Company’s CEO and CFO, for the 2016 purchase of a 45,070 square foot building in Wilmington, Delaware which was developed into a cannabis seed-to-sale facility and is currently leased to the Company’s cannabis-licensed client in that state. 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 December 31, 2019 and 2018, the outstanding principal balance on this mortgage was approximately $1,682,000 and $1,792,000, respectively, of which approximately $105,000 and $102,000, respectively, was current.

In May 2016, the Company entered into a mortgage agreement with DuQuoin State Bank (“DSB”) for the purchase of two properties which the Company developed into two 3,400 square foot free-standing retail dispensaries in Illinois. On May 5^th of each year, this mortgage is due to be repaid unless it is renewed for another year at a rate determined at the discretion of DSB’s executive committee. The mortgage was renewed in May 2019 at a rate of 8.5% per annum. At December 31, 2019 and 2018, the outstanding principal balance on this mortgage was approximately $829,000 and $850,000, respectively, of which approximately $24,000 and $23,000, respectively, was current.

Notes Payable

In June 2019, the Company and MariMed Hemp, its wholly-owned subsidiary, issued a secured promissory note in the principal amount of $10 million to an unaffiliated party (the “$10M Note”). The proceeds from the $10M Note were used to finance a portion of the purchases of hemp seed inventory previously discussed in Note 1 – Organization and Description of Business. The $10M Note provided for the repayment of principal plus a payment of $1.5 million on January 31, 2020. At December 31, 2019, the pro-rata portion of such payment, based on the term of the $10M Note, approximated $1,307,000 and was charged to interest expense. The $10M Note imposes certain covenants on the borrowers, all of which were complied with as of December 31, 2019.

In February 2020, the Company entered into an amendment agreement with the holder of the $10M Note, whereby the Company and MariMed Hemp issued an amended and restated promissory note in the principal amount of $11,500,000 (the “$11.5M Note”), bearing interest at a rate of 15% per annum, due on June 15, 2020, and with monthly interest payments and minimum amortization payments of $3,000,000 in the aggregate due on or before April 30, 2020, of which the Company has already paid $2,300,000. The $11.5M Note is secured by a first priority security interest in the assets of certain of the Company’s subsidiaries and brands, and a pledge of the Company’s ownership interest in certain of its subsidiaries. The $11.5M Note imposes certain covenants on the borrowers effective on the date of the amendment agreement.

As part of the $10M Note transaction, the Company issued three-year warrants to purchase 375,000 shares of common stock at an exercise price of $4.50 per share to the holder of the $10M Note. The fair value of these warrants on the issuance date of approximately $601,000 was recorded as a discount to the $10M Note. Approximately $523,000 of the warrant discount was amortized to interest expense in 2019. Accordingly, the carrying value of the $10M Note approximated $9.92 million at December 31, 2019.

In April 2019, MariMed Hemp issued a secured promissory note in the principal amount of $1,000,000 to an unaffiliated party. The proceeds of the note were used to finance a portion of the purchases of hemp seed inventory previously discussed in Note 1 – Organization and Description of Business. The note is secured by the collateral assignment of certain receivables from GenCanna (the “Secured Receivables”) and certain obligations of GenCanna to MariMed Hemp. The principal balance plus a payment of $180,000, initially due on December 31, 2019, was extended to March 31, 2020 in accordance with the terms of the note, requiring an additional payment of $30,000 payable on the extended due date. MariMed Hemp can elect to repay the note in whole or in part without penalty, provided the noteholder is given proper notice and MariMed Hemp is not in default of the note agreement. Upon such election, the entire payment of $180,000 and additional payment of $30,000 shall be deemed earned by and due to the noteholder.

In March 2019, the Company raised $6 million through the issuance of a secured promissory note to an unaffiliated party bearing interest at a rate of 13% per annum and a service fee of $900,000 (the “$6M Note”). The proceeds of the note were used to finance a portion of the purchases of hemp seed inventory previously discussed in Note 1 – Organization and Description of Business. The note is secured by the collateral assignment of certain receivables from and obligations of GenCanna to MariMed Hemp. The note’s initial maturity date of December 31, 2019 was extended to April 30, 2020 in accordance with the terms of the note, with the Company paying an extension fee in December 2019 of $300,000 which was charged to interest expense. At December 31, 2019, accrued interest payable on the note approximated $635,000.

In September 2018, the Company raised $3 million from the issuance of a secured promissory note to the same unaffiliated party of the $6M Note, bearing interest at a rate of 10% per annum, with interest payable monthly through an initial maturity date of March 31, 2020 (the “$3M Note”). The Company may elect to prepay the $3M Note in whole or part at any time after December 17, 2018 without premium or penalty provided the noteholder is given proper notice and the Company is not in default of the note agreement. The $3M Note was extended for an additional six months in accordance with its terms, with the interest rate increasing to 12% per annum during the extension period. The $3M Note is secured by the Company’s property in Maryland.

As part of $3M Note transaction, the Company issued three-year warrants to the lender’s designees to purchase 750,000 shares of the Company’s common stock at an exercise price of $1.80 per share. The Company recorded a discount on the $3M Note of approximately $1,511,000 from the allocation of note proceeds to the warrants based on the fair value of such warrants on the issuance date. Approximately $882,000 of the warrant discount was amortized to interest expense during 2018, and the remaining $629,000 was amortized during 2019. At December 31, 2019 and 2018, the carrying value of the $3M Note was $3 million and approximately $2.37 million (principal less the remaining warrant discount of $629,000), respectively.

In addition to the above transactions, the Company raised $2,760,000 in 2019 from the issuance of promissory notes to individuals and accredited investors bearing interest at rates of 10% to 18% per annum, and maturing in 2020 and 2021. No additional promissory notes were issued in 2018 than those previously described above.

Note Settlements

During 2018, holders of previously issued promissory notes with principal balances of $1,075,000 converted such promissory notes into 1,568,375 shares of common stock at conversion prices ranging from $0.65 to $0.90 per share. The conversions resulted in the recording of non-cash losses of approximately $829,000 in the aggregate based on the fair value of the common stock on the dates of conversion. No conversions of promissory notes occurred during 2019.

During 2019 and 2018, the Company issued 2,435,116 shares and 3,827,373 shares of its common stock, respectively, and subscriptions on zero and 79,136 shares of its common stock, respectively to retire promissory notes (principal and accrued interest) of approximately $1,047,000 and $7,590,000, respectively. The Company recorded non-cash losses of approximately $2.5 million in 2018 based on the fair value of the common stock on the retirement dates. No such losses were incurred in 2019.

During 2018, the Company repaid $700,000 of promissory notes. No repayments of promissory notes occurred during 2019.

Debt Maturities

As of December 31, 2019, the aggregate scheduled maturities of the Company’s total debt outstanding, inclusive of the promissory notes and mortgages described within this Note 11 – Debt, and the convertible debentures described in the following Note 12 – Debentures Payable, were: