MRMD 10-Q
Marimed Inc. (MRMD)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the Quarterly Period ended
For the transition period from __________________ to __________________
Commission
File number
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) |
(Address of Principal Executive Offices)
(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.
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).
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 ☐ | |
| 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 ☐
As of May 10, 2022, shares of the registrant’s common stock were outstanding.
MariMed Inc.
Table of Contents
| 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 | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Deferred rents receivable | ||||||||
| Notes receivable, current portion | ||||||||
| Inventory | ||||||||
| Investments | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangibles, net | ||||||||
| Investments | - | |||||||
| Notes receivable, less current portion | ||||||||
| Right-of-use assets under operating leases | ||||||||
| Right-of-use assets under finance leases | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities, mezzanine equity, and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Income taxes payable | ||||||||
| Sales and excise taxes payable | ||||||||
| Notes payable, current portion | ||||||||
| Mortgages payable, current portion | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Finance lease liabilities, current portion | ||||||||
| Other current liabilities | - | |||||||
| Total current liabilities | ||||||||
| Notes payable, less current portion | ||||||||
| Mortgages payable, less current portion | ||||||||
| Operating lease liabilities, less current portion | ||||||||
| Finance lease liabilities, less current portion | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Mezzanine equity: | ||||||||
| Series B convertible preferred stock, $ par value; shares authorized, issued and outstanding at March 31, 2022 and December 31, 2021 | ||||||||
| Series C convertible preferred stock, $par value; shares authorized at March 31, 2022 and December 31, 2021; shares issued and outstanding at March 31, 2022 and December 31, 2021 | ||||||||
| Total mezzanine equity | ||||||||
| Stockholders’ equity: | ||||||||
| Undesignated preferred stock, $ par value; shares authorized at March 31, 2022 and December 31, 2021; shares issued and outstanding at March 31, 2022 and December 31, 2021 | - | - | ||||||
| Common stock, $ par value; shares authorized at March 31, 2022 and December 31, 2021; and shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Common stock subscribed but not issued; and shares at March 31, 2022 and December 31, 2021, respectively | - | |||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities, mezzanine equity, and stockholders’ equity | $ | $ | ||||||
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)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Personnel | ||||||||
| Marketing and promotion | ||||||||
| General and administrative | ||||||||
| Bad debts | ||||||||
| Total operating expenses | ||||||||
| Operating income | ||||||||
| Non-operating income (expenses): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Loss on obligations settled with equity | - | ( | ) | |||||
| Gain (loss) on change in fair value of investment | ( | ) | ||||||
| Other investment income | - | |||||||
| Total non-operating income (expenses), net | ( | ) | ||||||
| Income before income taxes | ||||||||
| Provision for income taxes | ||||||||
| Net income | $ | $ | ||||||
| Net income attributable to noncontrolling interests | $ | $ | ||||||
| Net income attributable to MariMed Inc. | $ | $ | ||||||
| Net income per share | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Weighted average common shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to condensed consolidated financial statements.
| 4 |
MariMed Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts; unaudited)
| 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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Issuance of subscribed shares | - | ( | ) | ( | ) | - | - | - | ||||||||||||||||||||||||
| Stock grants | - | - | - | - | - | |||||||||||||||||||||||||||
| Exercise of warrants | - | - | - | - | - | |||||||||||||||||||||||||||
| Amortization of option grants | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Issuance of stand-alone warrants | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Conversion of debentures payable | - | - | - | - | ||||||||||||||||||||||||||||
| Conversion of promissory notes | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock issued to settle obligations | - | - | - | - | - | |||||||||||||||||||||||||||
| Equity issuance costs | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||
| Distributions | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | |||||||||||||||||||||||||||
| Balances at March 31, 2021 | $ | $ | | $ | $ | ( | ) | $ | ( | ) | $ | | ||||||||||||||||||||
| 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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock grants | - | - | - | - | - | |||||||||||||||||||||||||||
| Exercise of options | - | - | - | - | - | |||||||||||||||||||||||||||
| Amortization of option grants | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Conversion of promissory notes | - | - | - | - | ||||||||||||||||||||||||||||
| Fees paid with stock | - | - | - | - | ||||||||||||||||||||||||||||
| Distributions | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net income | - | - | - | - | - | |||||||||||||||||||||||||||
| Balances at March 31, 2022 | | ( | ) | ( | ) | | ||||||||||||||||||||||||||
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)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income attributable to MariMed Inc. | $ | $ | ||||||
| Net income attributable to noncontrolling interests | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of intangibles | ||||||||
| Amortization of stock grants | ||||||||
| Amortization of option grants | ||||||||
| Amortization of stand-alone warrant issuances | - | |||||||
| Amortization of warrants attached to debt | - | |||||||
| Amortization of beneficial conversion feature | - | |||||||
| Amortization of original issue discount | - | |||||||
| Bad debt expense | ||||||||
| Fees paid with stock | - | |||||||
| Loss on obligations settled with equity | - | |||||||
| Gain (loss) on change in fair value of investment | ( | ) | ||||||
| Other investment income | ( | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Deferred rents receivable | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ( | ) | ||||
| Other assets | - | ( | ) | |||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Income taxes payable | ||||||||
| Sales and excise taxes payable | ( | ) | ||||||
| Operating lease payments, net | ( | ) | ( | ) | ||||
| Finance lease interest payments | ||||||||
| Other current liabilities | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Purchase of cannabis licenses | ( | ) | ( | ) | ||||
| Investment in Green Growth Group, Inc. | ( | ) | - | |||||
| Interest on notes receivable | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of preferred stock | - | |||||||
| Equity issuance costs | - | ( | ) | |||||
| Repayments of promissory notes | ( | ) | ( | ) | ||||
| Payments on mortgages | ( | ) | ( | ) | ||||
| Proceeds from exercise of options | - | |||||||
| Proceeds from exercise of warrants | - | |||||||
| Due to related parties | - | ( | ) | |||||
| Finance lease principal payments | ( | ) | ( | ) | ||||
| Distributions | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net change to cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash activities: | ||||||||
| Finance lease right-of-use assets and liabilities | $ | $ | ||||||
| Conversion of promissory notes | $ | $ | ||||||
| Conversions of debentures payable | $ | $ | ||||||
| Operating lease right-of-use assets and liabilities | $ | $ | ||||||
| Common stock issued to settle obligations | $ | $ | ||||||
| Issuance of common stock associated with subscriptions | $ | $ | ||||||
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
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. | ||||
| Mia Development LLC | ||||
| Mari Holdings IL LLC | ||||
| Mari Holdings MD LLC | ||||
| Mari Holdings NJ LLC | ||||
| Mari Holdings NV LLC | ||||
| Mari Holdings Metropolis LLC | ||||
| Mari Holdings Mt. Vernon LLC | ||||
| Mari Mfg LLC | ||||
| Hartwell Realty Holdings LLC | ||||
| iRollie LLC | ||||
| ARL Healthcare Inc. | ||||
| KPG of Anna LLC | ||||
| KPG of Harrisburg LLC | ||||
| MariMed OH LLC | ||||
| MariMed Hemp Inc. | ||||
| Meditaurus LLC | ||||
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 $
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 $
| 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,
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
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 | * | to years | ||||||
| Volatility factors | * | to | ||||||
| Risk-free interest rates | * | % to % | ||||||
| Dividend yield | * | % | ||||||
| * |
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.
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
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 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 and shares, respectively, (ii) warrants – convertible into and shares, respectively, (iii) Series B preferred stock – convertible into shares in both periods, (iv) Series C preferred stock – convertible into shares in both periods, and (v) promissory notes – convertible into and 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 and 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
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 $
The Harvest Foundation LLC
In
2019, the Company entered into a purchase agreement to acquire
The
purchase price is comprised of the issuance of (i) 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) $
Meditaurus LLC
In
September 2021, the Company acquired the remaining
The
carrying value of the noncontrolling interest of approximately $
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 shares of the Company’s common stock and
$
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
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.) | $ | $ | ||||||
| WM Technology Inc. | ||||||||
| Total current investments | ||||||||
| Non-current investments: | ||||||||
| Green Growth Group, Inc. | ||||||||
| MembersRSVP LLC | ||||||||
| Total investments | $ | $ | ||||||
Flowr Corp. (formerly Terrace Inc.)
In
December 2020, Terrace Inc., a Canadian cannabis entity in which the Company had an ownership interest of
This
investment is carried at fair value. The increase in fair value of approximately $
Green Growth Group Inc.
In
January 2022, the Company made a good faith deposit of $
MembersRSVP LLC
In
January 2021, the Company and MembersRSVP LLC, an entity that develops cannabis-specific software (“MRSVP”), in which the
Company owned a
In
addition to the reduction of the Company’s ownership interest to
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 $
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 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 $
| 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 | |
| ● | Maryland
– a | |
| ● | Massachusetts
– a |
The Company subleases the following properties:
| ● | Delaware
– a | |
| ● | Delaware
– a | |
| ● | Delaware
– a |
At
March 31, 2022 and December 31, 2021, cumulative fixed rental receipts under such leases approximated $
Future minimum rental receipts for non-cancellable leases and subleases as of March 31, 2022 were (in thousands):
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ |
| 16 |
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) | $ | $ | ||||||
| First State Compassion Center (secondary note) | ||||||||
| Healer LLC | ||||||||
| High Fidelity Inc. | ||||||||
| Total notes receivable | ||||||||
| Notes receivable, current portion | ||||||||
| Notes receivable, less current portion | $ | $ | ||||||
First State Compassion Center
The
Company’s cannabis-licensed client in Delaware, First State Compassion Center (“FSCC”), issued a
In
December 2021, financed trade accounts receivable balances from FSCC of approximately $
Healer LLC
In
March 2021, the Company was issued a promissory note in the principal amount of approximately $
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 $
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 $
| 17 |
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 | $ | $ | ||||||
| Ingredients and other raw materials | ||||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total inventory | $ | $ | ||||||
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 | $ | $ | ||||||
| Buildings and building improvements | ||||||||
| Tenant improvements | ||||||||
| Furniture and fixtures | ||||||||
| Machinery and equipment | ||||||||
| Construction in progress | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
During
the three months ended March 31, 2022 and December 31, 2021, additions to property and equipment approximated $
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 $
Depreciation
expense for the three months ended March 31, 2022 and 2021 approximated $
| 18 |
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
$
The
goodwill associated with acquisitions is reviewed on a quarterly basis for impairment. Based on this review and other factors, the goodwill
of approximately $
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 | $ | $ | ||||||
| Bank of New England – Wilmington, DE property | ||||||||
| DuQuoin State Bank – Anna, IL and Harrisburg, IL properties | ||||||||
| DuQuoin State Bank – Metropolis, IL property | ||||||||
| South Porte Bank – Mt. Vernon, IL property | ||||||||
| Total mortgages payable | ||||||||
| Mortgages payable, current portion | ||||||||
| Mortgages payable, less current portion | $ | $ | ||||||
The
Company maintains an amended and restated mortgage agreement with the Bank of New England bearing interest at a rate of
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
| 19 |
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
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 shares of the Company’s common stock, which were valued at $
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 $
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 $
Promissory Note Conversions
During
the three months ended March 31, 2021, the noteholder of an $
During
2021, in a series of transactions, the noteholder converted $
During
the three months ended March 31, 2022, the noteholder converted the remaining principal balance of $
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
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
Promissory Note Issued by MariMed Hemp Inc.
In
September 2020, the Company paid down $
At
March 31, 2022 and December 31, 2021, the Company was carrying an accrued interest balance of approximately $
| 20 |
Debt Maturities
At March 31, 2022, the aggregate scheduled maturities of the Company’s total debt outstanding were (in thousands):
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total |
NOTE 12 – DEBENTURES PAYABLE
In
a series of transactions from the period October 2018 through February 2020, the Company sold an aggregate of $
As
of March 31, 2021, the holder of the $21M Debentures had converted the entire $
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 $ 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 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 $, 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 $
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:
| ● | . |
| ● | . |
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 $ 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 $
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 $
| 22 |
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 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 to .
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 and shares of common stock, respectively, to an employee for services in lieu of salary. These granted shares, with a fair value of approximately $ in 2022 and $ 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 shares of common stock valued at approximately $
During
the three months ended March 31, 2021, the Company issued shares of common stock associated with previously issued subscriptions
on common stock with a fair value of approximately $
As
previously disclosed in Note 11 – Promissory Notes, during the three months ended March 31, 2022 and 2021, the Company issued
shares common stock upon the conversion of $
As
previously disclosed in Note 12 – Debentures Payable, during the three months ended March 31, 2021, the Company issued
shares common stock upon the conversion of $
As further disclosed in Note 15 – Options, during the three months ended March 31, 2022, shares of common stock were issued in connection with the exercise of stock options. 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 shares of common stock were exercised. 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 and shares of common stock, valued at approximately $ and $, 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.
| 23 |
During
the three months ended March 31, 2021, the Company granted -year options to purchase up to shares of common stock at exercise
prices ranging from $ to $ per share. The fair value of these options of approximately $
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 $ and $, respectively.
During the three months ended March 31, 2022, options to purchase shares of common stock were exercised at an exercise price of $. No stock options were exercised during the three months ended March 31, 2021.
During the three months ended March 31, 2021, options to purchase shares of common stock expired. stock options expired during the three months ended March 31, 2022.
| Exercise Price | Shares Under Option | Remaining Life | ||||||||||||
| per Share | Outstanding | Exercisable | in Years | |||||||||||
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| 24 |
NOTE 16 – WARRANTS
During
the three months ended March 31, 2021, the Company issued four-year warrants to Hadron to purchase up to
During
the three months ended March 31, 2021, warrants to purchase
During
the three months ended March 31, 2021, warrants to purchase
At
March 31, 2022 and 2021, warrants to purchase up to
NOTE 17 – REVENUES
For the three months ended March 31, 2022 and 2021, the Company’s revenues were comprised of the following major categories (in thousands):
Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Product sales - retail | $ | $ | ||||||
| Product sales - wholesale | ||||||||
| Real estate rentals | ||||||||
| Supply procurement | ||||||||
| Management fees | ||||||||
| Licensing fees | ||||||||
| Total revenues | $ | $ | ||||||
For
the three months ended March 31, 2022 and 2021, revenues from two clients represented
NOTE 18 – BAD DEBTS
The Company maintains two types of reserves to address uncertain collections of amounts due—an allowance against trade accounts receivable (the “AR Allowance”), and a reserve against cash advanced by the Company to its cannabis-licensed clients for working capital purposes (the WC Reserve”).
During
the three months ended March 31, 2022, the Company made no change to the AR Allowance, and increased the WC Reserve by approximately
$
| 25 |
NOTE 19 – RELATED PARTY TRANSACTIONS
In July 2021, the Company granted options to purchase up to shares of common stock to each of the Company’s three independent board members at an exercise price of $per share.
In
December 2021, the CEO and CFO each exercised options to purchase shares of common stock on a cashless basis. The
exercise price of $per share was paid via the surrender by each
individual of
The
Company’s corporate offices are leased from an entity in which the Company’s CFO has an investment interest. This lease expires
in October 2028 and contains a five-year extension option. During the three months ended March 31, 2022 and 2021, expenses incurred under
this lease approximated $
The
Company procures nutrients, lab equipment, cultivation supplies, furniture, and tools from an entity owned by the family of the Company’s
COO. The aggregate purchases from this entity during the three months ended March 31, 2022 and 2021 approximated $
The
Company pays royalties on the revenue generated from its Betty’s Eddies product line to an entity owned by the Company’s
COO and its SVP of Sales under a royalty agreement. This agreement was amended effective January 1, 2021 whereby, among other modifications,
the royalty percentage changed from 2.5% on all sales of Betty’s Eddies products to
During
the three months ended March 31, 2022 and 2021, one of the Company’s majority-owned subsidiaries paid aggregate distributions
of approximately $
During
the three months ended March 31, 2022 and 2021, the Company purchased fixed assets and consulting services of approximately $
During
the three months ended March 31, 2022 and 2021, the Company purchased fixed assets of approximately $
The Company’s mortgages with Bank of New England, DuQuoin State Bank, and South Porte Bank are personally guaranteed by the Company’s CEO and CFO.
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NOTE 20 – COMMITMENTS AND CONTINGENCIES
Lease Commitments
The details of the Company’s operating lease agreements are as follows:
| ● | Delaware
– | |
| ● | Delaware
– a | |
| ● | Delaware
– a | |
| ● | Nevada
– | |
| ● | Massachusetts
– | |
| ● | Maryland
– a |
The
Company leases machinery and office equipment under finance leases that
The components of lease expense for the three months ended March 31, 2022 were as follows (in thousands):
| Operating lease cost | $ | |||
| Finance lease cost: | ||||
| Amortization of right-of-use assets | $ | |||
| Interest on lease liabilities | ||||
| Total finance lease cost | $ |
The
weighted average remaining lease term for operating leases is
Future minimum lease payments as of March 31, 2022 under all non-cancelable leases having an initial or remaining term of more than one year were (in thousands):
| Operating Leases | Finance Leases | |||||||
| 2022 | $ | $ | ||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total lease payments | $ | |||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| $ | $ | |||||||
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In February 2022, the Company was notified that it was awarded a cannabis dispensary license from the state of Ohio. The Company is awaiting the final verification process to be completed by the state. As of March 31, 2022, the lease terms of the Ohio Leases were all less than one year, and accordingly the Company was not required to record a right-of-use asset and corresponding lease liability on its balance sheet.
In April 2022, the Company extended the term of one of the Ohio Leases, and the remaining five Ohio Leases were terminated.
Terminated Employment Agreement
In July 2019, Mr. Kidrin, also a former director of the Company, filed a complaint in the Massachusetts Superior Court, which alleged the Company failed to pay all wages owed to him and breached the employment agreement, and requested multiple damages, attorney fees, costs, and interest. The Company moved to dismiss certain counts of the complaint and asserted counterclaims against Mr. Kidrin alleging breach of contract, breach of fiduciary duty, money had and received, and unjust enrichment.
In
August 2021, the parties entered into a settlement
agreement and general release pursuant to which (i) Mr. Kidrin’s complaint was dismissed with prejudice, (ii) the Company
issued to Mr. Kidrin five-year warrants to purchase up to
In
August 2021, the fair value of the warrants of approximately $
Maryland Litigation
Following the consummation of the Kind acquisition previously discussed in Note 3 – Acquisitions, in April 2022, the Maryland litigation between the Company and the members of Kind was dismissed in its entirety with prejudice, and the parties have released one another of any and all claims between them.
DiPietro Lawsuit
In April 2022, the parties agreed to dismiss all direct claims and counterclaims asserted in this litigation, as set forth below. In addition to their direct claims, the parties also asserted derivative claims, which may be dismissed only with the court’s approval. On April 12, 2022, the court approved the form of notice to be delivered to unit holders of Mia Development LLC (“Mia”) and Mari Holdings MD LLC (“Mari-MD”), majority-owned subsidiaries of the Company, and scheduled a hearing to approve dismissal of all derivative claims for June 8, 2022.
In this action, Jennifer DiPietro, one of the former members of Kind, directly and derivatively on behalf of Mari-MD and Mia, commenced a suit in August 2020 against the Company’s CEO, CFO, and wholly-owned subsidiary MariMed Advisors Inc. (“MMA”), in Suffolk Superior Court, Massachusetts. DiPietro brought claims for breach of fiduciary duty, breach of contract, fraud in the inducement, aiding and abetting the alleged breach of fiduciary duty, and also sought access to books and records and an accounting related to her investments in Mari-MD and Mia. DiPietro sought unspecified money damages and rescission of her interest in Mari-MD, but not of her investment in Mia, which had provided substantial returns to her as a member.
The Company answered the complaint and MMA filed counterclaims against DiPietro on its own behalf and derivatively on behalf of Mari-MD for breach of her fiduciary duties to each of those entities, and for tortious interference with Mari-MD’s lease and MMA’s management services agreement with Kind.
In December 2021, the parties entered into a global confidential settlement and release agreement, along with the parties to the aforementioned Maryland litigation. As of the same date, MMA and Jennifer DiPietro entered into a membership interest purchase agreement pursuant to which the Company will purchase DiPietro’s interests in Mia and Mari-MD, as previously discussed in Note 3 – Acquisitions. Upon the court’s approval on the parties’ joint motion for approval on June 8, 2022, the purchase DiPietro’s interests shall be consummated, the parties shall release all direct and derivative claims against one another, and the parties shall file stipulations dismissing all claims and counterclaims with prejudice within three days of that ruling.
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Bankruptcy Claim
During
2019, the Company’s MMH subsidiary sold and delivered hemp seed inventory to GenCanna Global Inc., a Kentucky-based cultivator,
producer, and distributor of hemp (“GenCanna”). At the time of sale, the Company owned a
In February 2020, GenCanna USA, GenCanna’s wholly-owned operating subsidiary, under pressure from certain of its creditors including MGG Investment Group LP, GenCanna’s senior lender (“MGG”), agreed to convert a previously-filed involuntary bankruptcy proceeding with the U.S. Bankruptcy Court in the Eastern District of Kentucky (the “Bankruptcy Court”) into a voluntary Chapter 11 proceeding. In addition, GenCanna and GenCanna USA’s subsidiary, Hemp Kentucky LLC (collectively with GenCanna and GenCanna USA, the “GenCanna Debtors”), filed voluntary petitions under Chapter 11 in the Bankruptcy Court.
In
May 2020, after an abbreviated solicitation/bid/sale process, the Bankruptcy Court, over numerous objections by creditors and shareholders
of the GenCanna Debtors which included the Company, entered an order authorizing the sale of all or substantially all of the assets of
the GenCanna Debtors to MGG. After the consummation of the sale of all or substantially all of their assets and business, the GenCanna
Debtors n/k/a OGGUSA, Inc. and OGG, Inc. (the “OGGUSA Debtors”) filed their liquidating plan of reorganization (the “Liquidating
Plan”) to collect various prepetition payments and commercial claims against third parties, liquidate the remaining assets of the
ODDUSA Debtors, and make payments to creditors. The Company and the unsecured creditors committee filed objections to such Liquidating
Plan, including opposition to the release of litigation against the OGGUSA Debtors’ senior lender, MGG, for lender liability, equitable
subordination, and return of preference. As a part of such plan confirmation process, the OGGUSA Debtors filed various objections to
proofs of claims filed by various creditors, including the proof of claim in the amount of approximately $
Since the approval of the Liquidating Plan, the OGGUSA Debtors have been in the process of liquidating the remaining assets, negotiating and prosecuting objections to other creditors’ claims, and pursuing the collection of accounts receivable and Chapter 5 bankruptcy avoidance claims.
In
January 2022, the Company, at the request of the Liquidating Plan administrator for the OGGUSA Debtors, executed a written release of
claims, if any, of the Company against Huron Consulting Group (“Huron”), a financial consulting and management company retained
by the senior lender of the OGGUSA Debtors to perform loan management services for the lender and OGGUSA Debtors prior to and during
their Chapter 11 bankruptcy cases. Such release was executed in connection with a comprehensive settlement agreement between the OGGUSA
Debtors and Huron. In consideration for the Company’s execution of the release, Huron paid an additional $
As of the date of this filing, there is still insufficient information as to what portion, if any, of the Company’s allowed claim will be paid upon the completion of the liquidation of the remaining assets of the OGGUSA Debtors.
NOTE 21 – SUBSEQUENT EVENTS
Consummation of Kind Acquisition and Dismissal of Litigation
In April 2022, the Maryland Medical Cannabis Commission approved the Company’s acquisition of Kind as previously discussed in Note 3 – Acquisitions, 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. The cash portion of the purchase price, $ million, was funded out of available working capital. Additionally, following the consummation of the acquisition, the Maryland litigation between the Company and the former members of Kind was dismissed in its entirety with prejudice, and the parties released one another of any and all claims between them.
In April 2022, the Company and DiPietro agreed to dismiss all direct claims and counterclaims asserted in a separate litigation between them, as previously discussed in Note 20 – Commitments and Contingencies. In addition to their direct claims, the parties also asserted derivative claims, which may be dismissed only with the court’s approval. On April 12, 2022, the court approved the form of notice to be delivered to unit holders of Mia and Mari-MD, and scheduled a hearing to approve dismissal of all derivative claims for June 8, 2022. After such approval, the Company shall purchase DiPietro’s interests in Mia and Mari-MD, the parties shall release all direct and derivative claims against one another, and the parties shall file stipulations dismissing all claims and counterclaims with prejudice within three days of that ruling.
Consummation of Green Growth Group Acquisition
In April 2022, the acquisition of Green Growth Group previously discussed in Note 3 – Acquisitions was consummated by the parties.
Lease Agreements
In April 2022, the Company extended the term of one of the Ohio Leases previously discussed in Note 20 – Commitments and Contingencies, and the remaining five Ohio Leases were terminated.
Equity Transactions
In
April 2022, warrants to purchase shares of common stock were exercised on a cashless basis. The exercise price of $
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Item 2. Management’s Discussions and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
When used in this form 10-Q and in future filings by the Company with the Commission, the words or phrases such as “anticipate,” “believe,” “could,” “should,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. These factors include, but are not limited to, changes that may occur to general economic and business conditions; changes in current pricing levels that we can charge for our services or which we pay to our suppliers and business partners; changes in political, social and economic conditions in the jurisdictions in which we operate; changes to laws and regulations that pertain to our products and operations; and increased competition.
The following discussion should be read in conjunction with the unaudited financial statements and related notes which are included under Item 1 of this report.
We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.
Overview
General
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.
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Revenues
The Company’s revenues are primarily comprised of the following categories:
| ● | Product Sales – direct sales of cannabis and cannabis-infused products primarily by the Company’s retail dispensaries and wholesale operations in Massachusetts and Illinois. | |
| ● | 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. | |
| ● | Management – fees for providing the Company’s cannabis clients with comprehensive oversight of their cannabis cultivation, production, and dispensary operations. Along with this oversight, the Company provides human resources, regulatory, marketing, and other corporate services. | |
| ● | 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. | |
| ● | Licensing – revenue from the sale of the 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. |
Expenses
The Company classifies its expenses into three general categories:
| ● | Cost of Revenues – the direct costs associated with the generation of the Company’s revenues. | |
| ● | Operating Expenses – comprised of the sub-categories of personnel, marketing and promotion, general and administrative, and bad debts. | |
| ● | Non-operating Income and Expenses – comprised of the sub-categories of interest expense, interest income, loss on obligations settled with equity, gain (loss) on changes in fair value of investment, and other investment income. |
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Liquidity and Capital Resources
The Company produced the following improvements to its liquidity in the reported periods:
| ● | Cash and cash equivalents increased 13% to $33.5 million at March 31, 2022, from $29.7 million at December 31, 2021. | |
| ● | Working capital increased 16% to $20.1 million at March 31, 2022 from $17.4 million at December 31, 2021. | |
| ● | Cash flow provided by operating activities increased 26% to $8.5 million in the three months ended March 31, 2022 from $6.8 million in the same period in 2021. | |
| ● | Net income before income taxes increased 43% to $7.9 million in the three months ended March 31, 2022 from $5.5 million in the same period in 2021. |
The aforementioned improvements to the Company’s liquidity were primarily the result of increases in revenues and profitability generated by the Company’s cannabis operations in the states of Illinois and Massachusetts. These operations launched as part of the Company’s aforementioned Consolidation Plan to transition from a consulting business to a direct owner of cannabis licenses and operator of seed-to-sale operations.
Additionally, the section below entitled Non-GAAP Measurement discusses an additional financial measure not defined by GAAP which the Company’s management uses to evaluate liquidity.
Operating Activities
Net cash provided by operating activities in the three months ended March 31, 2022 was $8.5 million, compared to $6.8 million in the same period in 2021. The year-over-year improvement was primarily attributable to the increase in cannabis-derived profits generated by the Company’s four active retail dispensaries in Illinois, and its retail and wholesale operations in Massachusetts.
Investing Activities
Net cash used in investing activities in the three months ended March 31, 2022 was $4.4 million, compared to $2.9 million in the same period in 2021. The increase was attributable to an increase in property and equipment expenditures in 2022 for the Company’s facilities in Delaware, Illinois, Maryland, and Massachusetts.
Financing Activities
Net cash used in financing activities in the three months ended March 31, 2022 was $329,000, compared with net cash provided by financing activities of $5.4 million in the same period in 2021. In early 2021, the Company entered into a securities purchase agreement with Hadron Healthcare Master Fund (“Hadron”) whereby Hadron agreed to provide funding of up to $46.0 million to repay debt, to fund expansion plans of existing operations, and to finance planned acquisitions. The fluctuation in cash from financing activities was attributable to the receipt of $23.0 million under this facility, offset by issuance costs and debt repayments in March 2021. No financing was raised by the Company in 2022.
The balance of Hadron’s committed funding of $23.0 million 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.
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Results of Operations
Three months ended March 31, 2022 compared to three months ended March 31, 2021
Revenues grew to $31.3 million in the first quarter of 2022, an increase of $6.6 million or 27%, compared to $24.6 million in the same period in 2021. The increase was primarily attributable to the growth of the Company’s (i) retail dispensary cannabis sales in Illinois, where one new dispensary commenced operations in May 2021, and (ii) supply procurement revenue generated primarily from the Company’s cannabis clients in Delaware and Maryland.
Cost of revenues were $14.3 million in the first quarter of 2022 compared to $11.5 million in the same period in 2021, an increase of $2.8 million or 25%. The variance was primarily due to the higher level of revenues as these costs are largely variable in nature and fluctuate in-step with revenues. As a percentage of revenues, these costs decreased slightly to 45.7% in 2022 from 46.5% in the same period in 2021 due to increased operating efficiencies.
As a result of the foregoing, gross profit grew to $17.0 million in the first quarter of 2022 from $13.2 million in the same period in 2021.
Personnel expenses increased to $3.0 million in the first quarter of 2022 from $1.7 million in the same period in 2021. The increase was primarily due to the hiring of additional staff to support higher levels of projected revenue from existing operations as well as from the Kind acquisition. As a percentage of revenues, personnel expenses increased to 9.7% in the first quarter of 2022 from to 7.0% in the same period in 2021.
Marketing and promotion costs increased to $643,000 in the first quarter of 2022 from $225,000 in the same period in 2021. The increase is attributable to the Company’s focused efforts to upgrade its marketing initiatives and personnel in order to expand branding and distribution of its licensed products. As a percentage of revenues, these costs increased to 2.1% in the first quarter of 2022 from 0.9% in the same period in 2021.
General and administrative costs increased to $6.2 million in the first quarter of 2022 from $3.2 million in the same period in 2021. This change is primarily due to increases of (i) $2.1 million in non-cash equity compensation expense from option grants in fiscal 2021 that continued vest in the first quarter of 2022, and (ii) $275,000 in net professional fees primarily due to the hiring of consultants, offset by a reduction in legal costs. The increase is also due to smaller increases in insurance, facility costs, insurance, and depreciation that are in line with the growth of the Company.
Bad debt expense decreased to $14,000 in the first quarter of 2022 from $1,025,000 in the same period in 2021, due to higher reserve balances required on aged trade receivable balances in 2021.
As a result of the foregoing, the Company generated operating income of $7.0 million in both the first quarter of 2022 and the same period in 2021.
Net non-operating income was $852,000 in the first quarter of 2022 compared to net non-operating expenses of $1,524,000 in the same period in 2021. The change is due to a $1,199,000 reduction of interest expense from lower levels of outstanding debt, non-cash income of $954,000 in 2022 from a nonconsolidated investment, and a $93,000 year-over-year increase in the fair value of a second nonconsolidated investment.
As a result of the foregoing, the Company generated income before income taxes of $7.9 million in the first quarter of 2022, compared to $5.5 million in the same period in 2021. After a tax provision of $3.7 million in 2022 and $1.2 million in 2021, net income was $4.2 million in the first quarter of 2022, compared to $4.3 million in the same period in 2021.
Non-GAAP Measurement
In addition to the financial information reflected in this report, which is prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), the Company is providing a non-GAAP financial measurement of profitability – Adjusted EBITDA – as a supplement to the preceding discussion of the Company’s financial results.
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Management defines Adjusted EBITDA as net income, determined in accordance with GAAP, excluding the following:
| - | interest income and interest expense; | |
| - | income taxes; | |
| - | depreciation of fixed assets and amortization of intangibles; | |
| - | non-cash expenses on debt and equity issuances; | |
| - | impairment or write-downs of intangible assets; | |
| - | unrealized gains and losses on investments and currency translations; | |
| - | legal settlements; | |
| - | gains or losses from the extinguishment of debt via the issuance of equity; | |
| - | discontinued operations; and | |
| - | merger- and acquisition-related transaction expenses. |
Management believes Adjusted EBITDA is a useful measure to assess the performance and liquidity of the Company as it provides meaningful operating results by excluding the effects of expenses that are not reflective of its operating business performance. In addition, the Company’s management uses Adjusted EBITDA to understand and compare operating results across accounting periods, and for financial and operational decision making. The presentation of Adjusted EBITDA is not intended to be considered in isolation or as a substitute for the financial information prepared in accordance with GAAP.
Management believes that investors and analysts benefit from considering Adjusted EBITDA in assessing the Company’s financial results and its ongoing business as it allows for meaningful comparisons and analysis of trends in the business. Adjusted EBITDA is used by many investors and analysts themselves, along with other metrics, to compare financial results across accounting periods and to those of peer companies.
As there are no standardized methods of calculating non-GAAP measurements, the Company’s calculations may differ from those used by analysts, investors, and other companies, even those within the cannabis industry, and therefore may not be directly comparable to similarly titled measures used by others.
Reconciliation of Net Income to Adjusted EBITDA (a Non-GAAP Measurement)
The table below reconciles Net Income to Adjusted EBITDA for the three months ended March 31, 2022 and 2021 (in thousands):
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| Net income | $ | 4,241 | $ | 4,310 | ||||
| Interest expense, net | 150 | 1,478 | ||||||
| Income taxes | 3,660 | 1,204 | ||||||
| Depreciation and amortization | 842 | 639 | ||||||
| Earnings before interest, taxes, depreciation, and amortization | 8,893 | 7,631 | ||||||
| Amortization of stock grants | 2 | 5 | ||||||
| Amortization of option grants | 2,469 | 295 | ||||||
| Amortization of stand-alone warrant issuances | - | 56 | ||||||
| Loss on equity issued to settle obligations | - | 1 | ||||||
| Gain (loss) on change in fair value of investment | (48 | ) | 45 | |||||
Other investment income | (954 | ) | - | |||||
| Adjusted EBITDA | $ | 10,362 | $ | 8,033 | ||||
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2022 Plans
For the balance of 2022 and into 2023, the Company’s focus will be to continue to execute its Strategic Growth Plan. The Company’s priority activities will include the following:
| 1) | Continue to consolidate the cannabis businesses that the Company has developed and manages. | ||
| 2) | Expand revenue, assets, and its footprint in the states in which the Company is operating. | ||
| - | In Massachusetts, the Company intends to open two additional dispensaries and significantly expand the capacity and capability of its manufacturing facility. | ||
| - | In Delaware, the Company intends to develop an additional 40,000 square feet of cultivation and production at its facility in Milford. | ||
| - | In Maryland, the Company intends to expand its manufacturing facility by 40,000 square feet and open a dispensary in Annapolis. | ||
| - | In Illinois, the Company intends to go vertical by acquiring one or more craft licenses and to potentially add up to six more dispensaries up to the statutory limit of ten. | ||
| 3) | Expand into other legal states through M&A and filing new applications in states where new licensing opportunities arise. | ||
| 4) | Expand revenues by producing and distributing its award-winning brands to qualified strategic partners or acquiring production and distribution licenses. | ||
No assurances can be given that any of these plans will come to fruition or that if implemented will necessarily yield positive results.
Subsequent Events
Please refer to Note 21 – Subsequent Events of the Company’s financial statements included in this report for a discussion of material events that occurred after the balance sheet date.
The issuance of the shares of common stock described in Note 21 – Subsequent Events of the Company’s financial statements were deemed to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon Sections 4(a)(2) and/or 4(a)(5) of the Securities Act. In accordance with Rule 144(d)(3)(ii) of the Securities Act, no legend restricting the sale, transfer, or other disposition of these shares was required.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Inflation
In the opinion of management, inflation has not had a material effect on the Company’s financial condition or results of its operations.
Seasonality
In the opinion of management, the Company’s financial condition and results of its operations are not materially impacted by seasonal sales.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is a “smaller reporting company” as defined by Regulation S-K and, as such, is not required to provide the information contained in this item pursuant to Regulation S-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its CEO and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures (defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2022 (the “Evaluation Date”). Based upon that evaluation, the CEO and CFO concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (i) are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) are accumulated and communicated to the Company’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
Over the past several years, the Company implemented significant measures to remediate past instances of ineffectiveness of the Company’s internal control over financial reporting, The remediation measures consisted of the engagement of accounting consultants as needed to provide expertise on specific areas of the accounting guidance, the hiring of individuals with appropriate experience in internal controls over financial reporting, and the modification to the Company’s accounting processes and enhancement to the Company’s financial control. Further, the Company expanded its board of directors to include a majority of independent disinterested directors; established an audit, compensation, and corporate governance committee of the board of directors; and adopted a formal policy with respect to related party transactions.
Other than as described above, there was no change to the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) that occurred during the fiscal quarter ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
In April 2022, the Maryland litigation between the Company and the members of Kind was dismissed in its entirety with prejudice, and the parties released one another of any and all claims between them.
In April 2022, the Company and DiPietro agreed to dismiss all direct claims and counterclaims asserted in a separate litigation between them. In addition to their direct claims, the parties also asserted derivative claims, which may be dismissed only with the court’s approval. On April 12, 2022, the court approved the form of notice to be delivered to unit holders of Mia Development LLC and Mari Holdings MD LLC, majority-owned subsidiaries of the Company, and scheduled a hearing to approve dismissal of all derivative claims for June 8, 2022.
Other than the above, there has been no material change to the status of the Company’s legal proceedings.
Item 1A. Risk Factors
As a smaller reporting company, the Company is not required to provide the information contained in this item pursuant to Regulation S-K. However, information regarding the Company’s risk factors appears in Part I, Item 1A. of its Annual Report on Form 10-K for the year ended December 31, 2021. These risk factors describe some of the assumptions, risks, uncertainties, and other factors that could adversely affect the Company’s business or that could otherwise result in changes that differ materially from management’s expectations. There have been no material changes to the risk factors contained in the Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2022, the Company issued (i) 1,142,858 shares of common stock upon the conversion of $400,000 of promissory notes, (ii) 10,000 shares of common stock in connection with the exercise of stock options at an exercise price of $0.30 per share, and (iii) 375,000 shares of common stock valued at $274,000 in exchange for consulting services.
The issuance of the shares of common stock described above were deemed to be exempt from registration under the Securities Act in reliance upon Sections 4(a)(2) and/or 4(a)(5) of the Securities Act. A legend restricting the sale, transfer, or other disposition of these securities other than in compliance with the Securities Act was placed on the securities issued in the foregoing transactions.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| 38 |
| 101.INS XBRL | Instance Document * | |
| 101.SCH XBRL | Taxonomy Extension Schema * | |
| 101.CAL XBRL | Taxonomy Extension Calculation Linkbase * | |
| 101.DEF XBRL | Taxonomy Extension Definition Linkbase * | |
| 101.LAB XBRL | Taxonomy Extension Label Linkbase * | |
| 101.PRE XBRL | Taxonomy Extension Presentation Linkbase * | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * |
* Filed herewith.
** Furnished herewith in accordance with Item 601 (32)(ii) of Regulation S-K.
*** This exhibit is a management contract or compensatory plan or arrangement.
| 39 |
| (a) | Previously filed as an exhibit to the Registration Statement on Form 10-12G (File No. 000-54433) filed on June 9, 2011 and incorporated herein by reference. |
| (b) | Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2016, filed on April 17, 2017 and incorporated herein by reference. |
| (c) | Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2021, filed on March 16, 2022 and incorporated herein by reference. |
| (d) | Previously filed as Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A, filed on August 26, 2019 and incorporated herein by reference. |
| (e) | Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended September 30, 2019, filed on November 29, 2019 and incorporated herein by reference. |
| (f) | Previously filed as an exhibit to the Current Report on Form 8-K filed on February 12, 2020 and incorporated herein by reference. |
| (g) | Previously filed as an exhibit to the Current Report on Form 8-K filed on February 12, 2020 and incorporated herein by reference. |
| (h) | Previously filed as an exhibit to the Current Report on Form 8-K filed on February 27, 2020 and incorporated herein by reference. |
| (i) | Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended March 31, 2020, filed on May 28, 2020 and incorporated herein by reference. |
| (j) | Previously filed as an exhibit to the Current Report on Form 8-K filed on June 30, 2020 and incorporated herein by reference. |
| (k) | Previously filed as an exhibit to the Current Report on Form 8-K filed on June 30, 2020 and incorporated herein by reference. |
| (l) | Previously filed as an exhibit to the Current Report on Form 8-K filed on June 30, 2020 and incorporated herein by reference. |
| (m) | Previously filed as an exhibit to the Current Report on Form 8-K filed on October 26, 2020 and incorporated herein by reference. |
| (n) | Previously filed as an exhibit to the Current Report on Form 8-K filed on October 26, 2020 and incorporated herein by reference. |
| (o) | Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 29, 2013 and incorporated herein by reference. |
| (p) | Previously filed as an exhibit to the Current Report on Form 8-K filed on March 2, 2021 and incorporated herein by reference. |
| (q) | Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended September 30, 2021 filed on November 15, 2021 and incorporated herein by reference. |
| (r) | Previously filed as an exhibit to the Current Report on Form 8-K filed on March 23, 2021 and incorporated herein by reference. |
| (s) | Previously filed as an exhibit to the Current Report on Form 8-K filed on July 9, 2021 and incorporated herein by reference. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
Date: May 10, 2022
| MARIMED INC. | ||
| By: | /s/ Robert Fireman | |
| Robert Fireman | ||
President and Chief Executive Officer (Principal Executive Officer) |
||
| By: | /s/ Jon R. Levine | |
| Jon R. Levine | ||
Chief Financial Officer (Principal Financial Officer) |
||
| 41 |
INDEX TO EXHIBITS
| 42 |
| 101.INS XBRL | Instance Document * | |
| 101.SCH XBRL | Taxonomy Extension Schema * | |
| 101.CAL XBRL | Taxonomy Extension Calculation Linkbase * | |
| 101.DEF XBRL | Taxonomy Extension Definition Linkbase * | |
| 101.LAB XBRL | Taxonomy Extension Label Linkbase * | |
| 101.PRE XBRL | Taxonomy Extension Presentation Linkbase * | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * |
* Filed herewith.
** Furnished herewith in accordance with Item 601 (32)(ii) of Regulation S-K.
*** This exhibit is a management contract or compensatory plan or arrangement.
| 43 |
| (a) | Previously filed as an exhibit to the Registration Statement on Form 10-12G (File No. 000-54433) filed on June 9, 2011 and incorporated herein by reference. |
| (b) | Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2016, filed on April 17, 2017 and incorporated herein by reference. |
| (c) | Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2021, filed on March 16, 2022 and incorporated herein by reference. |
| (d) | Previously filed as Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A, filed on August 26, 2019 and incorporated herein by reference. |
| (e) | Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended September 30, 2019, filed on November 29, 2019 and incorporated herein by reference. |
| (f) | Previously filed as an exhibit to the Current Report on Form 8-K filed on February 12, 2020 and incorporated herein by reference. |
| (g) | Previously filed as an exhibit to the Current Report on Form 8-K filed on February 12, 2020 and incorporated herein by reference. |
| (h) | Previously filed as an exhibit to the Current Report on Form 8-K filed on February 27, 2020 and incorporated herein by reference. |
| (i) | Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended March 31, 2020, filed on May 28, 2020 and incorporated herein by reference. |
| (j) | Previously filed as an exhibit to the Current Report on Form 8-K filed on June 30, 2020 and incorporated herein by reference. |
| (k) | Previously filed as an exhibit to the Current Report on Form 8-K filed on June 30, 2020 and incorporated herein by reference. |
| (l) | Previously filed as an exhibit to the Current Report on Form 8-K filed on June 30, 2020 and incorporated herein by reference. |
| (m) | Previously filed as an exhibit to the Current Report on Form 8-K filed on October 26, 2020 and incorporated herein by reference. |
| (n) | Previously filed as an exhibit to the Current Report on Form 8-K filed on October 26, 2020 and incorporated herein by reference. |
| (o) | Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 29, 2013 and incorporated herein by reference. |
| (p) | Previously filed as an exhibit to the Current Report on Form 8-K filed on March 2, 2021 and incorporated herein by reference. |
| (q) | Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended September 30, 2021 filed on November 15, 2021 and incorporated herein by reference. |
| (r) | Previously filed as an exhibit to the Current Report on Form 8-K filed on March 23, 2021 and incorporated herein by reference. |
| (s) | Previously filed as an exhibit to the Current Report on Form 8-K filed on July 9, 2021 and incorporated herein by reference. |
| 44 |