Quarterly report pursuant to Section 13 or 15(d)

RELATED PARTY TRANSACTIONS

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RELATED PARTY TRANSACTIONS
9 Months Ended
Sep. 30, 2020
Related Party Transactions [Abstract]  
RELATED PARTY TRANSACTIONS

NOTE 17 – RELATED PARTY TRANSACTIONS

 

During 2019, the Company, through its MariMed Hemp subsidiary, entered into several hemp seed sale transactions with GenCanna whereby the Company acquired large quantities of top-grade feminized hemp seeds with proven genetics at volume discounts that it sold to GenCanna at market rates. The seeds met the U.S. government’s definition of federally legal industrial hemp, which was descheduled as a controlled substance and classified as an agricultural commodity upon the signing of the 2018 U.S. Farm Bill.

 

The Company purchased $20.75 million of hemp seed inventory which it sold and delivered to GenCanna for $33.2 million. The Company provided GenCanna with extended payment terms through December 2019, to coincide with the completion of the seeds’ harvest, although the payment by GenCanna was not contingent upon the success of such harvest or its yield. To partially fund the seed purchases, the Company raised $17.0 million in debt financings which is reflected in Notes Payable on the balance sheet and previously discussed in Note 9 – Debt.

 

By the end of 2019, GenCanna had not paid the amount it owed the Company for its seed purchases due to several challenges it faced late in the year, including defaults under its senior credit facility, a fire at its main processing and lab facility, the domestic decline of CBD selling prices, and the contraction of the cannabis capital markets. In February 2020, as previously discussed in Note 4 – Investments, under pressure from certain of its creditors, the GenCanna Debtors agreed to convert a previously-filed involuntary bankruptcy proceeding into a voluntary Chapter 11 proceeding, and filed voluntary petitions under Chapter 11 in the Bankruptcy Court.

 

As required by the relevant accounting guidance, the Company initially recorded the $33.2 million due from GenCanna as a related party receivable, with approximately $29.0 million recognized as related party revenue, and approximately $4.2 million classified as unearned revenue (such amount representing the Company’s 33.5% ownership portion of the profit on these transactions, which was to have been recognized as revenue upon payment by GenCanna). As a result of GenCanna’s Chapter 11 proceedings, the Company fully reserved the receivable balance of approximately $29.0 million and wrote off the entire unearned revenue balance of approximately $4.2 million.

 

In 2019, the Company granted five-year options to purchase up to 100,000 shares of common stock to each of the Company’s three independent board members at an exercise price of $0.99 per share. The aggregate fair value of these options of approximately $191,000 was fully amortized at March 31, 2020. No options were granted to related parties during the nine months ended September 30, 2020.

 

In 2019, options to purchase 200,000 and 132,499 shares of common stock were exercised by the Company’s CEO and an independent board member, respectively, at weighted average exercise prices of $0.11 and $0.08 per share, respectively. The independent board member’s options were exercised on a cashless basis with the exercise prices paid via the surrender of 3,108 shares of common stock. No options were exercised by related parties during the nine months ended September 30, 2020.

 

In 2019, options to purchase 117,501 shares of common stock were forfeited by board members. No options were forfeited by related parties during the nine months ended September 30, 2020.

 

The Company’s current corporate offices are leased from a company owned by a related party under a 10-year lease that commenced August 2018 and contains a five-year extension option. During the nine months ended September 30, 2020 and 2019, expenses incurred under this lease approximated $117,000 in both periods.

 

The balance of Due To Related Parties at September 30, 2020 and December 31, 2019 of approximately $1,233,000 and $1,455,000, respectively, were comprised of amounts owed of approximately (i) $515,000 and $420,000, respectively, to the Company’s CEO and CFO, (ii) $673,000 and $990,000, respectively, to companies partially owned by these officers, and (iii) $45,000 in both periods to a stockholder of the Company. Such amounts owed are not subject to repayment schedules.

 

Both of the Company’s mortgages with Bank of New England discussed in Note 9 – Debt, as well as the mortgage with Commonwealth Real Estate Ventures LLC disclosed in Note 19 – Subsequent Events, are personally guaranteed by the Company’s CEO and CFO.