Item 1A Risk Factors 8
Item 1B Unresolved Staff Comments 15
Item 2 Properties 15
Item 3 Legal Proceedings 16
Item 4 Mine Safety Disclosures 16
Part II
Item 6 Selected Financial Data 18
Item 7A Quantitative and Qualitative Disclosures About Market Risk 26
Item 8 Financial Statements 27
Item 9A Controls and Procedures 64
Item 9B Other Information 64
Part III
Item 10 Directors, Executive Officers and Corporate Governance 65
Item 11 Executive Compensation 69
Item 14 Principal Accountant Fees and Services 73
Part IV
Item 15 Exhibits and Financial Statement Schedules 74
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
This
report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. These statements involve risks and uncertainties and our actual results could differ significantly
from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future,
which we indicate by words or phrases such as “anticipate,” “expect,” “estimate,” “could,”
“should,” “would,” “project,” “predict,” “intend,” “plan,”
“will,” “believe,” and similar language, including those set forth in the discussion under “Description
of Business,” “Risk Factors” and “Management’s Discussion and Analysis or Plan of Operation”
as well as those discussed elsewhere in this Form 10-K. We base our forward-looking statements on information currently available
to us, and we believe that the assumption and expectations reflected in such forward-looking statements are reasonable, and we
assume no obligation to update them. Statements contained in this Form 10-K that are not historical facts are forward-looking
statements that are subject to the “safe harbor” created by the Private Securities Litigation Reform Act of 1995.
PART
I
ITEM
1. BUSINESS.
Overview
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.
In 2018, the Company made the strategic decision
to transition from a consulting business to a direct owner of cannabis licenses and operator of seed-to-sale operations (hereinafter
referred to as the “Consolidation Plan”). The Consolidation Plan calls for the acquisition of its cannabis-licensed
clients located in Delaware, Illinois, Maryland, Massachusetts, and Nevada. In addition, the Consolidation Plan includes
the potential acquisition of a Rhode Island asset. All of these acquisitions are subject to state approval, and once consolidated,
the entities will operate under the MariMed banner. The Consolidation Plan is discussed in further detail in the section below
entitled Consolidation Plan.
To date, acquisitions of the licensed businesses
in Massachusetts and Illinois have been completed and establish the Company as a fully integrated seed-to-sale multi-state operator,
The acquisitions of the remaining entities located in Maryland, Nevada, and Delaware are at various stages of completion and subject
to each state’s laws governing the ownership transfer of cannabis licenses, which in the case of Delaware requires a modification
of current cannabis ownership laws to permit for-profit ownership. Meanwhile, the Company continues to expand these businesses
and maximize the Company’s revenue from rental income, management fees, and licensing royalties.
A
goal in completing this transition from a consulting business to a direct owner of cannabis licenses and operator of seed-to-sale
operations is to 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 providing operational and corporate guidance. Accordingly, the Company believes
it is well suited to own these facilities and manage the continuing growth of their operations.
The
Company has also 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 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 trademarked product recipes.
The Company’s proprietary cannabis
genetics produce flowers and concentrates under the brand name Nature’s HeritageTM, and cannabis-infused products under
the brand names Kalm Fusion®, in the form of chewable tablets and drink powder mixes, and the award-winning1 Betty’s
Eddies® brand of all natural fruit chews. Both cannabis-infused brands are top selling products in Maryland and Massachusetts2
and the Company intends to introduce additional products under these brands in 2021. The Company’s brand of hemp-infused
cannabidiol (“CBD”) products, FloranceTM, is distributed in the US and abroad.
The Company also has exclusive sublicensing
rights in certain states to distribute the Binske® line of cannabis products crafted from premium artisan ingredients, the
HealerTM line of medical full-spectrum cannabis tinctures, and the clinically tested medicinal cannabis strains developed
in Israel by global medical cannabis research pioneer Tikun OlamTM. The Company intends to continue licensing and distributing
its brands as well as other top brands in the Company’s current markets and in additional regulated markets worldwide.
In
March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The spread of the virus in the
United States and the measures implemented to contain it—including business shutdowns, indoor capacity restrictions, social
distancing, and diminished travel—have negatively impacted the economy and have created significant volatility and disruption
in financial markets. Consequently, the Company’s implementation of its aforementioned Consolidation Plan has been
delayed. Additionally, while the cannabis industry has been deemed an essential business, and is not expected to suffer severe
declines in revenue, the Company’s business, operations, financial condition, and liquidity have been impacted, as further
discussed in this report.
Despite
the pandemic, the Company’s operations have improved significantly over the past year as reflected in the following financial
highlights:
Over
the course of the Company’s history in the emerging cannabis industry, it has developed an excellent reputation for
strong management, with clients that have thrived in their respective markets. The Company’s goal is to continue this success
as it transitions from a manager and advisor to an owner and operator of cannabis businesses.
1 Awards won by the Company’s
Betty’s Eddies® brand include LeafLink 2020 Industry Innovator, Explore Maryland Cannabis 2020 Edible of the Year, and
LeafLink 2019 Best Selling Medical Product.
2 Source: LeafLink Insights
2020.
3
Core cannabis operations exclude the one-time hemp seed sales transactions in 2019
between the Company and a related party (the “Seed Transactions”) as discussed
in the Results of Operations section within Item 7. Management’s Discussion
And Analysis Of Financial Condition And Results Of Operations, and in the footnotes
accompanying the Company’s audited financial statements at December 31, 2020.
4
EBITDA is a non-GAAP financial measurement that is defined in Item 7. Management’s Discussion And Analysis Of Financial
Condition And Results Of Operations.
The Company’s strengths can
be summarized as follows:
Professional
Management
The Company’s management is one of the
most experienced and long-tenured in the cannabis industry. It has had considerable success creating and growing business
in the industry by successfully applying for cannabis licenses on behalf of its clients, overseeing the development of such
clients’ cannabis operations and security plans; sourcing real estate for cannabis facilities in receptive municipalities;
raising capital to purchase and develop facilities; and adhering operations to regulations established by individual state
governments, including all environmental and social governance requirements. The knowledge and experience of the Company’s
management provides a solid platform for the Company’s direct ownership through consolidation of the organic businesses
it developed and for expansion to other opportunities in other cannabis-legal states.
Development
of State-of-the-Art Cannabis Facilities and Operations
The
Company has developed state-of-the-art cannabis cultivation, production, and dispensary facilities in multiple states utilizing
the Company’s proprietary practices and implementing industry best practices. Its facilities are examples of operational
excellence under the Company’s proven management policies and processes.
Cannabis
Brand Creation
The
Company has developed unique brands of precision-dosed cannabis-infused products which are currently licensed and distributed
in cannabis-legal states. The Company intends to continue expanding both its brand portfolio and the licensing of its branded
products into additional cannabis-legal states and overseas.
Technological
and Scientific Innovation
The
Company is diligent in identifying and reviewing the latest sciences and processes applicable to the cultivation, distillation,
production, packaging, securing, and distribution of cannabis and cannabis-infused products. The Company has obtained the highest
quality cannabis strains and genetics. It is at the leading edge of patient education and physician outreach for cannabis, and
it seeks strategic relationships with companies that are at the forefront of extraction and distillation.
Education
and Knowledge Sharing
The
rapid growth of the legal cannabis market presents a global paradigm shift and challenges to medical professionals and consumers
who seek scientific knowledge and research regarding the medical benefits of cannabis. The Company provides educational research
and studies on its brands and products to its growing community of healthcare professionals and consumers. As cannabis becomes
more mainstream, medical providers will need to be educated on how to prescribe or make recommendations to their patients, and
consumers will need to learn how to gain the most benefit from certain strains, genetics, or formulations.
As
part of its education initiative, the Company is assembling a Scientific Advisory Board (the “SAB”) that includes
some of the most knowledgeable scientists and researchers focused on the scientific application of cannabis for health and wellness.
The SAB’s goals will include the development of strategies to address the most widespread and debilitating medical and dietary
conditions through the utilization of cannabis- and hemp-based therapies.
Consolidation Plan
As mentioned above, the Company’s
Consolidation Plan consists of the strategic decision made in 2018 to transition from a management and advisory firm in the
cannabis space, to a direct owner of cannabis licenses and seed-to-sale operations in Massachusetts, Illinois, Maryland, Nevada,
Delaware and Rhode Island. The following is a summary of the Company’s progress towards its Consolidation Plan.
Massachusetts
In
December 2018, the Massachusetts Cannabis Control Commission (the “MCCC”) approved the conversion of ARL Healthcare
Inc. (“ARL”), the Company’s cannabis-licensed client, from a non-profit entity to a for-profit corporation and
the transfer of ownership to the Company. ARL holds cannabis licenses for cultivation, production and dispensing.
The
Company’s 10,000 square foot dispensary, developed within its 22,700 square foot property in Middleboro, received
approval from the MCCC to commence operations in December 2019. The Company’s 70,000 square foot cultivation and
production facility, developed within its 138,000 square foot property in New Bedford, received approval from the MCCC to
commence operations in January 2020, with its first harvest completed in the first quarter of 2020. The cultivation and
production facility is now operating at full capacity as product demand remains very strong. The Company entered into an
agreement to acquire a second dispensary in Beverly in early 2021, and expects to complete the buildout and commence
operations, subject to approval by the MCCC, in late 2021.
Illinois
In
October 2019, the Illinois Department of Financial & Professional Regulation (the “IDFPR”) approved the Company’s
acquisition of KPG of Anna LLC and KPG of Harrisburg LLC, the Company’s two cannabis-licensed clients that operate Company-built
and -owned medical marijuana dispensaries in the state of Illinois (both entities collectively, the “KPGs”). As part
of this transaction, the Company also acquired the selling parties’ interests in Mari Holdings IL LLC (“Mari-IL”),
the Company’s subsidiary which owns the real estate in which the KPGs’ dispensaries are located.
Effective October 1, 2019, 100% of the operations
of these entities have been consolidated into the Company’s financial statements. Additionally, on January 1, 2020, the
state of Illinois legalized recreational adult-use cannabis, allowing the Company to operate both medical and recreational
adult-use programs in the Anna and Harrisburg dispensaries. In September 2020, a third recreational dispensary was opened
in Mt. Vernon, and a fourth recreational dispensary is under development in Metropolis, which the Company is in the
process of purchasing from the current landlord, and is expected to open in mid-2021, subject to final approval by
the IDFPR.
Maryland
In the fall of 2016, the Company and
the members of Kind Therapeutics USA Inc., the Company’s client in Maryland that holds licenses for the cultivation,
production, and dispensing of medical cannabis (“Kind”), agreed to a partnership/joint venture whereby Kind would be owned 70% by the
Company and 30% by the members of Kind, subject to approval by the Maryland Medical Cannabis Commission (“MMCC”).
In reliance thereon, the Company purchased, designed, and developed a 180,000 square foot cultivation and production facility
in Hagerstown, MD for occupancy and use by Kind, which became operational in late 2017, and the Company further agreed to
manage and finance all aspects of Kind’s cannabis business, as Kind had no background or experience in the
industry.
Prior to finalizing the documents
confirming the partnership/joint venture, the Company and the members of Kind negotiated and entered into a memorandum of
understanding (“MOU”) for the Company to acquire 100% of the membership interests of Kind in December 2018. Also
at that time, MariMed Advisors Inc, the Company’s wholly owned subsidiary, and Kind entered into a management services
agreement to provide Kind with comprehensive management services in connection with the business and operations of Kind (the
“MSA”), and Mari Holdings MD LLC, the Company’s majority-owned subsidiary, entered into a 20-year lease
with Kind for Kind’s utilization of the Hagerstown facility (the “Lease”). Additionally, in October 2019,
the Company purchased a 9,000 square foot building in Anne Arundel County which is to be developed into a dispensary to be
leased to Kind.
In 2019, the members of Kind sought to
renegotiate the terms of the MOU and has subsequently sought to renege on both the original partnership/joint venture and the
MOU. The Company engaged with the members of Kind in good faith in an attempt to reach updated terms acceptable to both
parties, however the members of Kind failed to reciprocate in good faith, resulting in an impasse. Incrementally, both
parties through counsel further sought to resolve the impasse, however such initiative resulted in both parties commencing
legal proceedings. As a result, the consummation of this acquisition has been delayed and may not ultimately be completed.
For further information, see Part I, Item 3. Legal Proceedings in this report.
Nevada
In
August 2019, the Company entered into a purchase agreement to acquire 100% of the ownership interests of The Harvest Foundation
LLC (“Harvest”), its cannabis-licensed client. Documentation requesting approval of the transaction has been submitted
to the state cannabis commission, which is pending. Harvest holds both medical and recreational adult-use cannabis cultivation
licenses, and operates in approximately 10,000 square feet of an industrial building that the Company leases and has built out
into a cannabis cultivation facility.
Delaware
Delaware’s current cannabis program
is for medical use only, and requires license holders to be not-for-profit entities. The Company provides comprehensive management
and real estate services to First State Compassion Center (“FSCC”), its cannabis-licensed client in this state.
The Company’s validated cannabis experience was instrumental in FSCC being granted Delaware’s first ever seed-to-sale
medical cannabis license, and two of the four statewide licenses.
FSCC leases the Company-developed 47,000
square foot seed-to-sale facility in Wilmington and the Company’s 4,000 square foot leased retail location
in Lewes which the Company developed into a cannabis dispensary. In 2019, the Company signed a lease with an option to
purchase a 100,000 square foot building in Milford, which it is currently developing into a second cultivation and production
facility for FSCC.
The Delaware medical program has grown
to over 10,000 licensed medical patients. FSCC, under the Company’s management, is currently operating two of the four cannabis
licenses in the state. The additional cultivation and production facility in Milford will bring a much needed supply of product
to a state where demand continues to outpace supply.
The state is expected to allow “for-profit”
ownership of cannabis licenses in the near future, at which time the Company will seek to acquire FSCC and obtain ownership of
the licenses and operations, subject to state approval.
Rhode Island
Rhode Island currently has a medical cannabis
program where license holders must be not-for-profit entities. The Company is in discussions to potentially
acquire a licensed cannabis asset in this state.
Corporate
History
The
Company was incorporated in the state of Delaware in January 2011 as a wholly-owned subsidiary of Worlds Inc. under the name Worlds Online Inc., which was later spun-off to its stockholders. At its inception, Worlds Online Inc. operated
online virtual environments. In 2014, the Company transitioned
its operational focus to the emerging cannabis industry and led the effort to win the cannabis license in Delaware on
behalf of its client. To date, the Company has won a total of 17 cannabis licenses on behalf of itself and its cannabis
clients.
The following is a summary of the Company’s
history over the past three calendar years:
In
2017, Robert Fireman was named as the Company’s CEO and President, and Jon R. Levine as the CFO, Treasurer, and Secretary.
The Company changed its name to MariMed Inc. and its ticker symbol to MRMD, which is quoted on the OTCQX exchange. Also in 2017,
the Company acquired the intellectual property, formulations, recipes, know-how, and certain other assets of the Betty’s
Eddies® brand of cannabis-infused fruit chews.
In
October 2018, the Company entered into a purchase agreement to acquire KPG of Anna LLC and KPG of Harrisburg LLC, the Company’s
two cannabis-licensed clients that operate medical marijuana dispensaries in the state of Illinois (both entities collectively,
the “KPGs”), and the KPGs’ owners’ interests in Mari Holdings IL LLC, the Company’s subsidiary that
owns the real estate where the KPGs’ two dispensaries are located. On October 1, 2019, the Illinois Department of Financial
and Professional Regulation approved the Company’s acquisition of the KPGs and Mari-IL, and the acquisition transaction
was consummated.
In
October 2018, the Company’s cannabis-licensed client in Massachusetts, ARL Healthcare Inc. (“ARL”), filed a
plan of entity conversion with the state to convert from a non-profit entity to a for-profit corporation, with the Company as
the sole shareholder of the for-profit corporation. At the time, ARL held three cannabis licenses from the state of Massachusetts
for the cultivation, production and dispensing of cannabis. In November 2018, the Company received written confirmation of state
approval of the conversion plan, resulting in ARL becoming a wholly-owned subsidiary of the Company.
In
November 2018, the Company issued a letter of intent to acquire The Harvest Foundation LLC, the Company’s client awarded
a cannabis license for cultivation in the state of Nevada. In August 2019, the parties entered into a purchase agreement governing
the transaction. The acquisition is conditional upon state approval of the transaction. At this time, the state has paused the
processing of cannabis license transfers, without indicating when it will resume. Upon the resumption of these activities and
the ensuing approval by the state, the Company expects to consummate this transaction whereby the operations of Harvest will be
consolidated into the Company’s financial statements.
In November 2018, the Company finalized
the purchase of an aggregate of $30.0 million of subordinated secured convertible debentures of GenCanna Global Inc., a Kentucky-based
cultivator, producer, and distributor of hemp and CBD (“GenCanna”). In February 2019, the Company converted the debentures
plus accrued interest through the conversion date into a 33.5% equity interest of GenCanna on a fully diluted basis. This investment
was written off in December 2019 as further discussed in the footnotes to the audited financial statements.
In December 2018, the Company and Kind entered into the aforementioned MSA and Lease.
In the fall of 2016, the Company and the members of Kind agreed to a partnership/joint venture whereby Kind would be owned 70%
by the Company and 30% by the members of Kind. In December 2018, prior to finalizing documents confirming the partnership/joint
venture, the Company and the members of Kind negotiated and executed the aforementioned MOU for the Company to acquire 100%
of the membership interests of Kind, subject to approval by the MMCC. As discussed in Part I, Item 3. Legal Proceedings in this report, the Company is currently in litigation
with Kind.
In
May 2019, the Company issued 500,000 shares of its common stock in exchange for an 8.95% interest in Terrace Inc. (“Terrace”),
a Canadian entity that develops and acquires international cannabis assets. In November 2019, the common stock of Terrace commenced
public trading on the Toronto Stock Venture Exchange. In December 2020, Terrace was acquired by Flowr Corp., a Toronto-headquartered
cannabis company with operations in Canada, Europe, and Australia, and the Company’s investment was converted into publicly
traded shares of Flowr Corp. (TSX.V: FLWR; OTC: FLWPF).
In
June 2019, the Company executed a purchase agreement to acquire a majority of MediTaurus LLC, a company established by Jokubas
Ziburkas PhD, a neuroscientist and leading authority on hemp-based CBD and the endocannabinoid system. MediTaurus operates in
the United States and Europe and has developed proprietary CBD formulations sold under its FloranceTM brand.
In
July 2019, the Company entered into a licensing agreement for the exclusive manufacturing and distribution in seven states of
the Binske® portfolio of products, a brand known for utilizing best-in-class proprietary strains and craft ingredients in
its edibles, concentrates, vaporizers, and topicals.
In
October 2019, the Company closed on the purchase of a 9,000 square foot building in Annapolis, MD which it is developing into
a medical marijuana dispensary.
On
October 1, 2019, the Illinois Department of Financial and Professional Regulation approved the Company’s acquisition of
the KPGs and Mari-IL, and as of such date, the KPGs and Mari-IL became wholly-owned subsidiaries of the Company.
In
January 2020, the Illinois legalized adult-use cannabis, which was added to the Company’s two existing cannabis licenses,
thereby increasing the Company’s operations in Illinois to service both medical and recreational cannabis consumers.
In
February 2020, the Company purchased a 4,800 square foot stand-alone retail building in Mt Vernon, IL which it developed into
state-approved adult-use cannabis dispensary that opened in September 2020.
In
July 2020, the Company refinanced a mortgage secured by its properties in Massachusetts generating proceeds of $13.0 million that
were used to pay down the initial mortgage and short term promissory notes.
In
February 2021, the Company entered into a five-year lease agreement for a 12,000 square foot premises located in Wilmington, DE
which the Company intends to develop into a cannabis production facility with offices, and sublease to its cannabis-licensed client
in this state.
Recent
Developments
In
March 2021, the Company entered into a securities purchase agreement with Hadron Healthcare Master Fund with respect to
a financing facility of up to $46.0 million in exchange for newly-designated Series C convertible preferred stock of the Company
and warrants to purchase the Company’s common stock. The initial proceeds of $23.0 million from the facility
were used to pay down debt, and will be used to upgrade certain of the Company’s owned and managed facilities.
The balance of the facility will fund the completion of the Company’s Consolidation Plan.
Competition
The
Company’s goal is to become a fully integrated multistate operator (“MSO”) of seed-to-sale cannabis operations.
The Company is different than some of the other MSOs in that it has incubated its client businesses from the bottom up,
built its own brands and branded products, and has retained its core management team from inception. Other MSOs have raised
significantly more capital, including on the Canadian Securities Exchange, and acquired assets in more states than the Company
has to date.
Additionally,
while Company has a comprehensive suite of products and services for the cannabis industry, it faces competition from companies
of varying sizes and geographic reach, who produce and sell similar products. Some of these companies provide a subset of the
Company’s product and service offerings, while others are able to provide an equivalent level of the products and services
offered by the Company. The Company, using its best practices and operational expertise, is able to produce cannabis products
at one of the lowest costs in the industry which enables the Company to remain competitive in its markets. That said, the Company’s
sales could be reduced significantly if its competitors develop and market products that are more effective, more convenient,
or are less expensive than its products.
Going
forward, as cannabis products become more mainstream and have greater acceptance, it is likely that larger and more established
companies, with greater available resources including name recognition and national distribution networks, will enter the field.
However, the Company believes that there are many barriers to entry and that to duplicate its licenses, know how, and facilities
would take years at a great expense. At the same time, the Company believes the emerging cannabis industry is growing at such
a pace that there are more opportunities available than current cannabis businesses can support. The Company is developing
marketing and software systems to expand branding and distribution, as well as database marketing, home delivery, and business
tactics developed by more conventional industries that will be important to the cannabis industry as it becomes more mainstream.
Intellectual
Property
The
Company’s Kalm Fusion® and Betty’s Eddies® branded product lines are trademarked. The company has filed for
trademark protection for its Nature’s HeritageTM and Kiss my RSOTM product lines.
The
Company’s proprietary processing, and manufacturing techniques and technologies, while not patented, are kept strictly confidential.
The Company enters into and enforces confidentiality agreements with key employees and consultants to protect its IP and general
know-how.
Employees
As
of December 31, 2020, the Company had a total of 233 employees, of which 181 were full-time. In addition, the Company utilized
a variety of supporting consultants and oversaw many employees of its cannabis-licensee clients to implement its policies and
procedures.
Website
Access to Company Reports
The
Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to
those reports are available free of charge on the Company’s website at www.marimedinc.com as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.
In
addition, copies of the Company’s annual report will be made available, free of charge, on written request.
ITEM
1A. RISK FACTORS
The
Company’s business is subject to numerous risks, including but not limited to those set forth below. The Company’s
operations and performance could also be subject to risks that do not exist as of the date of this report but emerge thereafter
as well as risks that the Company does not currently deem material.
Risks
Related to the Company’s Operations
Our
business, operations, financial condition, and liquidity have been and may continue to be affected by the outbreak of COVID-19.
In
March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The spread of COVID-19 in
the United States and the measures to contain it—including business shutdowns, indoor capacity restrictions, social distancing,
and diminished travel—have negatively impacted the economy and created significant volatility and disruption in financial
markets. Business shutdowns in certain states in response to stay-at-home orders and related measures had temporarily eliminated
access to our dispensaries by certain customers, principally non-medical use customers, impacting sales during this restricted
period. Further, the volatility in the financial markets and investor uncertainty has delayed our financing efforts and the implementation
of our Consolidation Plan. As a result, our business, operations, financial condition, and liquidity have been and may
continue to be impacted. Further, the disruption to the global economy and to our business, along with the decline in our stock
price, may also negatively impact the future carrying values of certain assets, including inventories, accounts receivables, intangibles,
and goodwill.
Marijuana
remains illegal under federal law.
Marijuana remains illegal under federal law.
It is a Schedule I controlled substance. Even in those jurisdictions in which the use of medical marijuana has been legalized
at the state level, its prescription is a violation of federal law. The United States Supreme Court has ruled that it is the federal
government that has the right to regulate and criminalize cannabis, even for medical purposes. Therefore, federal law criminalizing
the use of marijuana trumps state laws that legalize its use for even medicinal purposes. At present the states are standing tall
against the federal government, maintaining existing laws and passing new ones in this area. States continue to exert this freedom,
with more states considering legalization. However, we continually face election cycles, and a new administration or the United
States Congress could introduce a less favorable policy. A change in the federal attitude towards enforcement could cripple the
industry. There is currently broad support for changes in the federal law for improved banking, investing, and the potential
legalization of cannabis. However, there is no certainty what will get changed or when. The medical and recreational
marijuana industries are our primary markets, and if these industries were to be unable to operate, we would
lose our potential clients and licenses, which would have a significantly negative impact on our business, operations,
and financial condition.
Future
growth is dependent on additional states legalizing marijuana.
Continued
development of the marijuana market is dependent upon continued legislative authorization of marijuana at the state level for
medical and adult recreational use. Any number of factors could slow or halt the progress. Further, progress, while encouraging,
is not assured and the process normally encounters set-backs before achieving success. While there may be ample public support
for legislative proposal, key support must be created in the legislative committee or a bill may never advance to a vote. Numerous
factors impact the legislative process. Any one of these factors could slow or halt the progress and adoption of marijuana for
medical and/or recreational purposes, which would limit the market for our products and negatively impact our ability to grow
into other states.
It
will be difficult for you to evaluate us based on our past performance because we are transitioning our business in a new emerging
industry with a limited operating history.
We
have been actively engaged in the marijuana related business for a relatively short period of time and, accordingly, have only
limited financial results on which you can evaluate our company and operations. In addition, the components of our revenue and
costs are changing as we move away from a fee-based-only business to seed-to-sale operations. We are subject to, and must be successful
in addressing, the risks typically encountered by companies operating in the rapidly evolving cannabis marketplace, including
those risks relating to:
● the failure to develop brand name recognition and reputation;
● the failure to achieve market acceptance of our services;
● a slowdown in general consumer acceptance of legalized marijuana; and
● an inability to grow and adapt our business to evolving consumer demand.
The
medical cannabis industry faces strong opposition from traditional medicines.
It
is believed by many that existing, entrenched, well-funded, businesses may have a strong economic opposition to the medical marijuana
industry as currently formed. For example, we believe that the pharmaceutical industry does not want to cede control of any compound
that could become a strong selling drug. Specifically, medical marijuana will likely adversely impact the existing market for
Marinol, the current “marijuana pill” sold by mainstream pharmaceutical companies. Further, the medical marijuana
industry could face a material threat from the pharmaceutical industry should marijuana displace other drugs or simply encroach
upon the pharmaceutical industry’s market share for compounds such as marijuana and its component parts. The pharmaceutical
industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement. Any inroads
the pharmaceutical industry makes in halting or rolling back the medical marijuana movement could have a detrimental impact on
the market for our products and thus on our business, operations and financial condition.
Our
clients may have difficulty accessing the service of banks, which may make it difficult for them to purchase our products and
services.
As
discussed above, the use of marijuana is illegal under federal law. Therefore, there are banks that will not accept for deposit
funds from sale of cannabis and may choose not to do business with our clients. While there is pending legislation in the United
States Senate that will allow banks to transact business with state-authorized medical marijuana businesses, there can be no assurance
his legislation will be successful, that banks will decide to do business with medical marijuana retailers, or that in the absence
of legislation state and federal banking regulators will not create issues on banks handling funds generated from an activity
that is illegal under federal law. Notwithstanding, the Company has been able to secure state-chartered banks that are in compliance
with federal law and provide certain banking services to companies in the cannabis industry. The inability of potential clients
in our target market to open accounts and otherwise use the service of banks may make it difficult for them to purchase our products
and services.
We
may not be able to economically comply with any new government regulation that may be adopted with respect to the cannabis industry.
New
legislation or regulation, or the application of existing laws and regulations to the medical and consumer cannabis industries
could add additional costs and risks to doing business. We are subject to regulations applicable to businesses generally and laws
or regulations directly applicable to communications over the Internet and access to e-commerce. Although there are currently
few laws and regulations regulating the cannabis products, it is reasonable to assume that as cannabis use becomes more mainstream
that the FDA and or other federal, state and local governmental agencies will impose regulations covering the cultivation, purity,
privacy, quality control, security and many other aspects of the industry, all of which will likely raise the cost of compliance
thereby reducing profits or even making it more difficult to continue operations, either of which scenarios, if they occur, could
have a negative impact on our business and operations.
Our
relatively small size and limited resources may restrict our ability to manage any growth we may experience.
Growth
of our business may place a significant strain on our management systems and resources and may require us to implement new operating
and financial systems, procedures and controls. Our failure to manage our growth and expansion could adversely affect our business,
results of operations and financial condition. Failure to implement new systems effectively or within a reasonable period of time
could adversely affect our business, results of operations and financial condition. The Company is constantly looking to add additional
qualified talent to the management team to support its growth, but there is no assurance we will be successful in identifying
and/or hiring such people.
The
market may not readily accept our products.
Demand
and market acceptance for our licensed branded new cannabis-infused products are subject to a high level of uncertainty. The successful
introduction of any new product requires a focused, efficient strategy to create awareness of and desire for the products. For
example, in order to achieve market acceptance for our marijuana products we will need to gain market and patient acceptance.
Despite management’s efforts to gather data before introducing new products as a means to minimize the risk of product non-acceptance,
no assurance can be given that our efforts will be successful.
Our
marketing strategy may be unsuccessful and is subject to change as a result of a number of factors, including changes in market
conditions (including the emergence of new market segments which in our judgment can be readily exploited through the use of our
technology), the nature of possible license and distribution arrangements and strategic alliances which may become available to
us in the future and general economic, regulatory and competitive factors. There can be no assurance that our strategy will result
in successful product commercialization or that our efforts will result in initial or continued market acceptance for our proposed
products.
If
we are unable to protect our intellectual property rights, competitors may be able to use our technology or trademarks, which
could weaken our competitive position.
We
rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual
property rights. We enter into confidentiality or license agreements with our employees, consultants and customers, and control
access to and distribution of our products, and other proprietary information. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use our products.
If
we lose our key employee or fail to hire and retain other talented employees when necessary, our operations could be harmed.
The
success of our business is currently dependent, in large part, on the personal efforts of Messrs. Robert Fireman, Jon R. Levine,
and Timothy Shaw, our chief executive officer, chief financial officer, and chief operating officer, respectively. The loss of
their services could have a material adverse effect on our business. The success of our business is currently dependent, in large
part, upon our ability to hire and retain additional qualified management, marketing, technical, financial, and other personnel
if and when our growth so requires. Competition for qualified personnel is intense and we may not be able to hire or retain such
additional qualified personnel. Any inability to attract and retain qualified management and other personnel would have a material
adverse effect on our ability to grow our business and operations.
We
face competition from entities with greater resources than we have.
There
is potential that the Company will face intense competition from other companies, some of which can be expected to have longer
operating histories and more financial resources and experience than the Company. Increased competition by larger and better-financed
competitors could materially and adversely affect the business, financial condition, results of operations or prospects of the
Company.
Because
of the early stage of the industry in which the Company operates, the Company expects to face additional competition from new
entrants. To become and remain competitive, the Company will require research and development, marketing, sales and support. The
Company may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive
basis which could materially and adversely affect the business, financial condition, results of operations or prospects of the
Company.
The
introduction of a recreational model for cannabis production and distribution may impact the medical marijuana market. The impact
of this potential development may be negative for the Company, and could result in increased levels of competition in its existing
medical market and/or the entry of new competitors in the overall cannabis market in which the Company operates.
A
change in federal laws regarding the classification of cannabis as a controlled substance, interstate cannabis commerce, banking
for entities in the cannabis industry, or other related regulations may have a significant impact on the Company’s business.
Results
of clinical research, if unfavorable, could have a negative impact on the industries in which we operate and consequently on our
business model.
Research
in Canada, the United States and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social
acceptance of cannabis or isolated cannabinoids (such as CBD and THC) remains in early stages. There have been relatively few
clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). Although the Company believes that
the articles, reports and studies support its beliefs regarding the medical benefits, viability, safety, efficacy, dosing and
social acceptance of cannabis, future research and clinical trials may prove such statements to be incorrect, or could raise concerns
regarding, and perceptions relating to, cannabis. Future research studies and clinical trials may reach negative conclusions regarding
the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to cannabis,
which could have a material adverse effect on the demand for the Company’s products with the potential to lead to a material
adverse effect on the Company’s business, financial condition, results of operations or prospects.
We
face the prospect of claims of product liability if anyone is harmed by our products.
The
Company’s products will be produced for sale directly to end consumers, and therefore there is an inherent risk of exposure
to product liability claims, regulatory action and litigation if the products are alleged to have caused loss or injury. In addition,
the production and sale of the Company’s products involves the risk of injury to end users due to tampering by unauthorized
third parties or product contamination. Previously unknown adverse reactions resulting from human or animal consumption of the
Company’s products alone or in combination with other medications or substances could occur. The Company may be subject
to various product liability claims, including, among others, that its products caused injury or illness, include inadequate instructions
for use or include inadequate warnings concerning possible side effects or interactions with other substances. While the Company
has product liability insurance coverage in place and works with third party providers to ensure they do as well, a product liability
claim or regulatory action against the Company could exceed our insurance coverage, and could adversely affect the Company’s
reputation and have a material adverse effect on its business and operational results.
We
are subject to compliance with environmental regulations which can be onerous and costly.
The
Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations
mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations
on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in
a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent
environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors
and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s
operations.
Government
environmental approvals and permits are currently, and may in the future, be required in connection with the Company’s operations.
To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from implementing its proposed
business activities or from proceeding with the development of its operations as currently proposed.
Failure
to comply with applicable environmental laws, regulations and permitting requirements may result in enforcement actions thereunder,
including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective
measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required
to compensate those suffering loss or damage due to its operations and may have civil or criminal fines or penalties imposed for
violations of applicable laws or regulations which could have a material adverse effect on its business and operational results.
We
are subject to potential risks related to, and arising from, acquiring companies.
The
Company is in the process of acquiring several companies and intends to acquire other companies in the future. There are risks
inherent in any such acquisition. Specifically, there could be unknown or undisclosed risks or liabilities of such companies for
which the Company is not sufficiently indemnified. Any such unknown or undisclosed risks or liabilities could materially and adversely
affect the Company’s financial performance and results of operations. The Company could encounter additional transaction
and integration related costs or other factors such as the failure to realize all of the benefits from such acquisitions. All
of these factors could cause dilution to the Company’s earnings per share or decrease or delay the anticipated accretive
effect of the acquisition and cause a decrease in the market price of the Company’s securities. The Company may not be able
to successfully integrate and combine the operations, personnel and technology infrastructure of any such acquired company with
its existing operations. If integration is not managed successfully by the Company’s management, the Company may experience
interruptions in its business activities, deterioration in its employee and customer relationships, increased costs of integration
and harm to its reputation, all of which could have a material adverse effect on the Company’s business, financial condition
and results of operations. The Company may experience difficulties in combining corporate cultures, maintaining employee morale
and retaining key employees. The integration of any such acquired companies may also impose substantial demands on the Management.
There is no assurance that these acquisitions will be successfully integrated in a timely or cost-efficient manner, or at all.
In
the event we are sued for any reason, we would face potential cost and interference with our business operations.
The
Company is, and may from time to time become, party to litigation in the ordinary course of business which could adversely affect
its business. Should any litigation in which the Company is, or becomes, involved be determined against the Company, such a decision
could adversely affect the Company’s ability to continue operating. Even if the Company is involved in litigation and wins,